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Index funds put Vanguard on top

INVESTMENT FUNDS REPORTER

In a sign of a growing trend among retail investors, John Bogle, a long-time champion of low-cost index funds, now finds his mutual fund company at the top of the heap in the United States.

Index investing giant Vanguard Group Inc. has dethroned Fidelity Investments, which had occupied the No. 1 slot for more than two decades. Fidelity is best-known for its emphasis on star stock pickers like Peter Lynch.

Vanguard's rise marks a "landmark shift" in thinking as investors in both the United States and Canada increasingly choose indexing over active managers, said Jack Ablin, chief investment officer at Bank of Montreal's Harris Private Bank in Chicago. "Many investors for years have been frustrated that money managers have failed to outperform their respective benchmarks."

Index funds passively track stock market or fixed-income benchmarks, while active managers pick stocks based on research and analysis.

Vanguard oversaw $1.3-trillion (U.S.) in mutual fund assets at the end of July compared with $1.2-trillion at Fidelity, according to Washington-based Investment Company Institute. (Vanguard's numbers do not include its exchange-traded funds.)

Indexing is also enjoying growing popularity in Canada, as assets in index products more than doubled to $43.1-billion (Canadian) from $21.3-billion in 2003. But unlike the United States, where the trend to indexing has been driven by index mutual funds such as the ones offered by Vanguard, "the [growth of] indexing assets [in Canada has] really been driven by ETFs," said Carlos Cardone, senior consultant at Investor Economics.

The trend explains why exchange-traded funds "are a huge priority for us at Bank of Montreal," Mr. Ablin said. He was referring to the fact that BMO is the only Canadian bank selling ETFs. Since launching the products in mid-2009, it has attracted more than $1-billion in assets.

In contrast to the rapid expansion of the ETF market, the index mutual fund business in Canada has been shrinking. Assets in this segment fell to about $9.8-billion at the end of June from $14-billion in 2003, according to Investor Economics.

The fund arms of Canadian Imperial Bank of Commerce, Toronto-Dominion Bank and Royal Bank of Canada are the biggest players in the mutual fund index fund business.

Jonathan Hartman, vice-president of investment products at Royal Bank's fund arm, said that his bank hasn't seen a big demand for index mutual funds. "However, you are seeing growth in the ETF market" because these offerings, which must be purchased through a brokerage firm, can be easily traded, and have a lower management expense ratio (MER) than index mutual funds, Mr. Hartman acknowledged.

Dan Hallett, director of asset management for HighView Financial Group, suggested that growth in bank index funds is stagnating because the bank offerings haven't changed over the past five to 10 years.

"With more choice from ETFs, there is going to be some money that migrates there."

© 2007 The Globe and Mail. All rights reserved.

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