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MUTUAL FUNDS / RUSS WILES

Vanguard Group Enjoys Some Smooth Sailing

August 13, 1995|RUSS WILES | RUSS WILES, a financial writer for the Arizona Republic, specializes in mutual funds.

The Vanguard Group, the nation's second-largest mutual fund family, is on a roll:

* Since the start of the year, the Valley Forge, Pa., group has boosted its mutual fund assets by $25 billion, entrenching itself as the industry's No. 2 firm behind Fidelity Investments of Boston.

* Vanguard's broad lineup of low-cost, plain-vanilla bond funds avoided the bad publicity that hit fund companies that had dabbled in esoteric areas such as derivatives and Latin American debt last year.

* Vanguard's flagship Index Trust 500 Portfolio, which tracks the Standard & Poor's 500 index, has performed brilliantly this year, besting 90% of actively managed stock funds for the year to date and bolstering the arguments in favor of indexing, in which Vanguard is a leader.

* The company on Aug. 14 plans to unveil four aggressive stock funds to complement its mostly staid mix of equity portfolios. These have been named the Horizon funds.

"It's rare to have all of our cylinders hitting together, but it's happening for us right now," says John Bogle, the company's founder, chairman and chief executive.

Maybe "all oars in the water" would be a more apt description, considering Vanguard's image fixation with British warships of the Napoleonic era. Bogle named the company after Adm. Horatio Nelson's flagship at the Battle of the Nile, and the firm's prospectuses and annual reports are filled with nautical illustrations.

Vanguard employees are known as the "crew," the company health club is the "ship-shape" room and the cafeteria is known as the "galley."

All this came about because Bogle happened upon a man selling prints of English seascapes back in 1975, when he was looking to name the company.

What many investors might not realize is that Vanguard, now recognized as the industry's low-cost leader, levied sales charges in those early days and didn't convert to a no-load format until 1977.

"But looking at the future of the mutual fund business, you quickly came to the conclusion that the place to be was the no-load, direct-market area," Bogle says. "Even back then, people were becoming better educated about investments."

Today, Vanguard offers some of the lowest-cost funds anywhere. The Index Trust 500 Portfolio, for example, charges just 0.19% each year, equal to $19 on a $10,000 investment. Performance, of course, is reduced by whatever expenses a fund charges.

Vanguard is owned by its many mutual fund shareholders and essentially runs like a not-for-profit enterprise, with services provided at cost. This explains why the firm's expenses on individual funds are so low.

Vanguard also uses various other tactics to keep expenses down. For starters, its $3,000 minimum on taxable accounts is fairly high by industry standards and is one way to screen out smaller shareholders, who are proportionately costly to service.

A few Vanguard funds impose much higher minimums, such as the three Admiral bond portfolios, which require a $50,000 investment.

In addition, Vanguard tacks transaction fees ranging up to 2% on certain funds to discourage short-term traders, who also are costly to service. These aren't considered sales charges or loads because the fees collected are plowed back into the fund to defray trading and other costs. Nevertheless, the fees represent a real cost borne by shareholders.

It also helps that one in three Vanguard funds count more than $1 billion in assets--a higher proportion than at Fidelity, for example. Larger funds enjoy economies of scale that often show up in lower per-share expenses.

If Vanguard has a weakness, it's a relative lack of high-powered stock funds of the caliber of, say, a Fidelity Magellan. The four new Horizon funds have been touted as "Vanguard's answer to Fidelity's dominance in the aggressive stock-picking sweepstakes," writes Daniel Wiener, editor of the Independent Adviser for Vanguard Investors, an unaffiliated newsletter in Watertown, Mass.

It's worth noting that Morningstar Inc. of Chicago gives higher ratings to Vanguard's bond funds than to its stock portfolios. On Morningstar's five-point scale for measuring risk-adjusted performance, where 1 stands as the lowest score and 5 the highest, Vanguard's stock funds come in at an average 3.3 rating, while its bond products score an average 4.2. Vanguard's hybrid funds, which hold both stocks and bonds, score 3.8.

Bogle feels Vanguard's success can be explained partly by the time and money spent training shareholder-service representatives and other crew members.

In a customer-satisfaction survey released earlier this year by Dalbar Inc. of Boston, Vanguard tied for eighth place overall among 52 banks, brokerages, insurers and fund companies examined.

*

The Heartland Value Small Cap Contrarian Fund in Milwaukee has gotten off to a good start, attracting $23 million in assets since its debut in late April. The fund was launched shortly before sibling Heartland Value closed its doors to new investors on June 30, after surpassing $800 million in assets, a 15-fold increase since late 1992. Both Heartland funds ([800] 432-7856) invest in small stocks.

*

Fidelity Retirement Growth, a no-load stock fund ([800] 544-8888), gets a vote of confidence from IBC/Donoghue Inc. in Ashland, Mass. IBC's Moneyletter investment newsletter reveals that the firm's employees can choose any of five Fidelity funds for their 401(k) plan: Retirement Growth, Overseas, Balanced, Intermediate Bond and Government Money Market. "Retirement Growth is broad enough and aggressive enough to make it an excellent core," the newsletter says.

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