Vanguard Group: Leviathan Investment

    Vanguard Group
    Vanguard Group

    Very few companies boast managed assets worth several trillion dollars in the modern market for investment services. One such is the Vanguard Group.

    Who built this machine, how does it work, and why are millions of people willing to entrust their money to one company?


    Who are the Vanguard Group

    Описание Vanguard Group
    Description of the Vanguard Group

    The Vanguard Group is one of the largest investment companies of the world. He has been working in the USA (Pennsylvania) since 1975. According to the official site, , as of 2020, it unites more than 420 investment funds, of which 190 are located in the United States.

    The total number of investors is more than 30 million from 170 countries of the world. The total amount of funds under management is $ 6.5 trillion.

    For comparison - the planned budget revenues of the Russian Federation in 2020 - a little more than 20 trillion rubles. That is, The Vanguard Group manages 487 trillion rubles or more than 20 annual budgets of the Russian Federation. In the market, this financial Leviathan is second only to BlackRock.

    Official website Vanguard Group


    Венчурные инвестиции фонда Vanguard Group

    [1945904] Vanguard Group Fund Venture Investments

    As a unit investment fund, Vanguard Group only manages the funds of depositors and does not own anything except its own shares.

    Vanguard was the first company to retain revenue for distribution to the funds it serves. Prior to this, the funds transferred the profit to the management company, where a decision was already made on their further investment.

    Vanguard is very proud of the customer-oriented policy laid down by the first founder of the company - John Bogle .

    The site repeatedly focuses on the fact that the company belongs only to its investors, the latter can even vote or delegate their votes when making investment decisions.

    The largest funds managed by the Vanguard Group are:

    Vanguard Total Stock Market Index Fund.

    Vanguard 500 Index Fund Investor Share.

    Vanguard Total International Stock Index Fund.

    Vanguard Total Bond Market Index Fund.

    Vanguard Prime Money Market Fund.

    Vanguard Wellington Fund Investor Shares.

    Each fund is focused on a certain index, exchange or industry - this is the basis of investments with passive management, but more on that below.

    That is, to simplify, this whole colossus consists of several levels:

    1. Management company Vanguard Group.
    2. Concrete foundations of Vanguard.
    3. Institutional and global investors.
    4. Individual investors.

    In this case, the last two levels are the actual and legal owners of Vanguard.

    A bit of history

    История становления Vanguard Group
    The history of the Vanguard Group

    The history of the Vanguard Group, like many American companies - beautiful and romantic, and talks about the big dream of a little man. In general, it is worth it to get acquainted with it in detail here .

    We will try to make it shorter, with key points:

    • In 1974 John Bogle was fired from the post of executive vice director of Wellington investment company founded by Walter Morgan, however, Bogle retained membership in the board of directors for joint funds, which he was left as unpromising.
    • In 1975, Bogle founded Vanguard, a Wellington company that provided administrative services for managing funds.
    The name Vanguard literally translates as “Vanguard”. Bogle decided to name the company after Admiral Nelson's flagship - Vanguard.

    • In 1976 to remove Vanguard from the shadow of Wellington, Bogle, with the permission of the board of directors, creates the second in the history and the first successful index fund - First Index Investment Trust. Then it will become the Vanguard 500 Index Fund.
    • 1980th the company opened with a total volume of managed assets - $ 90 million, closed the decade with $ 7.5 billion
    • In 1996-m John Bogle leaves the post of manager due to heart surgery and advanced age (67 years), and in 1999 and the post of senior chairman on the board of directors.
    • In 2008, , the position of manager (after John Brenard) was taken by William McNabb III. He led Vanguard through the crisis with virtually no loss (net profit in 2008 - $ 84 billion), managing to maintain the trust of both investors and company employees;
    Since 1987, Vanguard has a personnel reserve - the so-called The Swiss Guard. These are specially trained employees who, at peak times, supplement the staff of consultants to explain to investors what to invest in and why not to sell.

    • After 2008 annually Vanguard only increases the total assets. In 2017 , Mortimer Buckley, who holds it to this day, received the position of manager.

    In general, until all of your coronaviruses and Black Thursdays of 2020, Vanguard felt fine and, given the conservative approach to investing, will close this unfortunate year relatively well.

    Pioneers of passive management

    Управление финансовыми активами
    Financial asset management

    Bogle made a “quiet revolution” among investment funds, making the main bet on the low cost of servicing assets with relatively low returns for investors.

    The Vanguard 500 Index Fund became the first large (and second in history) index fund, and all Vanguard funds are now working on this model.

    An index fund portfolio simply copies a portfolio of a specific market index. Using the example of the Vanguard 500 Index Fund, it looks like this:

    1. The fund buys shares of companies in the S&P 500 index in the same proportion in which they are included in the index itself.
    2. Then it issues securities for investors linked to the S&P 500.
    3. Issued securities grow at the same rate as the index, providing profit for investors.

    Here, for example, is a graph of the value of the shares of this fund on the Nasdaq exchange:

    График ценовой динамики акций фонда Vanguard 500 Index Fund (VFFSX)
    Price dynamics graph for the Vanguard 500 Index Fund ( VFFSX)

    And here is the graph of the index itself:

    График ценовой динамики индекса S&P 500
    Price dynamics graph of the S&P 500

    Such a model is based on market optimism - belief in the continuous market growth of the S&P 500 and other indices and, accordingly, an increase in the value of issued shares and the profits of investors. And also on the presence of impressive capital, which will make it possible to purchase such an extensive basket of assets that would allow to minimize any risk on a single security.

    By the way, in terms of capital - when establishing the Vanguard 500 Index Fund, Bogle was counting on $ 120 million in start-up investments that would make it possible to purchase shares in all 500 companies. However, he received only $ 11 million, and had to be limited to 200 enterprises.

    Принцип работы Vanguard 500 Index Fund
    How the Vanguard 500 Index Fund works
    Since the index is a certain average indicator of the dynamics of value, it cannot bring such significant losses as the shares of individual companies, but income is relatively low.

    Because of this passive approach, Wellington called the Vanguard 500 Index Fund “Bogl’s madness” and “not an American fund”, not believing that such a modest profit would suit investors .

    Due to low incomes, asset management costs become tangible. So, according to the data for 2015, unit (total) funds spend an average of 1.11% on activity, and if a fund gives 4-5% per year, then 1% on expenses is a pretty impressive amount. It is the index fund, as a type of mutual fund, that allows to solve this problem by:

    • In the case of Vanguard - direct sale of shares, without intermediary brokers;
    • Minimum expenses for the maintenance of management and analysts;
    • Practical complete absence of expenses for advertising and sellers.

    In other words, the index fund is just a mirror of a certain index, it does not need to contain expensive oracle analysts who can predict the dynamics of stock prices, and the security of investments makes it popular among conservative investors (primarily representatives of the middle class, agreeing to a low stable income).

    And this approach paid off - if in the 75th Vanguard spent 0.89% on maintenance, then in 2017 the costs were only 0.10%, that is, 10 times less than the average for mutual funds . In fact, such savings give investors an additional 1% return and increase Vanguard's competitiveness in the market, despite the relatively low profit. Due to this, the funds managed to grow to $ 6.5 trillion.

    The low cost of servicing assets creates the so-called “Vanguard effect” - if a company establishes a fund in a certain industry or with reference to a specific index, then the average investment expenditure indicator immediately sags in this industry. This is due to the fact that competitors are forced to reduce the cost of services in order to compete with Vanguard.

    John Bogle

    Основатель Vanguard Group Джон Богл
    Vanguard Group founder John Bogle

    The romance of the creator of Vanguard is not inferior to the history of the foundation and deserves at least a couple of paragraphs.

    John was born in 1929 in Montclair, New Jersey in the family of an entrepreneur. During the Great Depression, Bogle Sr. lost his business and became addicted to alcohol, and ultimately left his family altogether. As usual with all successful people in this world, John earned his first money at the age of 10.

    Bogle was able to get an education thanks to his mother’s brother, whose company provided a full scholarship to study at Blair Academy, which John graduated with honors in 1947. And in 1951, he graduated from Princeton University, receiving a diploma in economics.

    An interesting fact! Bogl had two brothers - David (twin) and older William, but his uncle could only pay for one of them. After conferring, David and William decided that it was John who should receive education and, apparently, did not fail.

    Actually, in Princeton, Bogle became interested in mutual funds and even wrote a thesis on them, for which he received the highest rating. After Princeton, another 5 years of study at the University of Pennsylvania School of Business and Finance followed. In parallel, John got a job at Wellington.

    His thesis was promoted by that very diploma work, after reading which Morgan made copies for all Wellington employees. Already in 1955, Bogle received the position of assistant to Morgan and worked in this position for more than 7 years. With its submission, the first Wellington Exchange Fund, the Windsor Fund, was established, which is still operating today.

    In 1965, he became executive vice president of the company, which at that time was in the downstream. To pull out Wellington, Bogle decided to acquire the fast-growing foundation of Thorndike, Doran, Paine & Lewis. However, the merger was unsuccessful due to different corporate values ​​and management models and did not give the expected results. In 1974, when Wellington shares fell from $ 40 to $ 8, John was politely asked to leave his position on the board.

    Well, then you know: the initiative to launch the index fund, removing it from the influence of the parent company and a bright, cloudless future for 30 million investors.

    On January 17, 2019, John Bogle died at the age of 89 due to stomach cancer. Interestingly, this active person suffered from heart diseases all his life and even underwent several operations, but the old woman with a scythe entered from the other side.

    In general, this is the story of a man who studied, then did, and then invented a real bike in the investment sector, slow but reliable, which was very liked by conservative investors. In the "builders of America", Bogle, of course, was late, but he can be ranked among the pillars of the investment market without hesitation. John is smart, be like John.

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