Technology & Scale in Asset Management

Here’s a fascinating stat from Vanguard CEO Bill McNabb (who recently sat down for another podcast interview with Barry Ritholtz):

One of the figures I always love to describe to people is — in 2000 the Internet was just starting to take hold, we had about $500 billion under management with 12,000 people. Today we’re a little less than 15,000 people and have, as you referenced, nearly $4 trillion. So technology has actually made that possible.

Vanguard’s assets are up eight fold but their headcount has only risen by 25%. I don’t care if most of their funds are index funds (and if you think managing an index fund is easy listen to this podcast where Patrick O’Shaughnessy interviews a Vanguard index fund PM). This is amazing when you consider the many complexities involved in the markets and running a business. It really shows the power of technology in allowing financial firms to run their businesses more efficiently.

I’ve seen plenty of fund firms get to the point where they should be able to use scale to their advantage and pass along some cost savings to their clients, only to blow it all on fancy offices, expensive paintings, huge bonuses and a bloated staff. These firms rarely go on to perform well for their investors.

Vanguard, on the other hand, seems to pass along the majority of their cost savings to the investors in their funds. Here’s a graph that depicts this quite well from The Economist last year:


For some reason, many people in the investment industry assume that Vanguard’s success is simply tied to the fact that they are an index fund pioneer (remember, Vanguard also has $1 trillion in actively managed funds that also perform quite well). I think this is only part of the reason their success. Any financial firm could have created and marketed index funds. What is difficult is creating the correct firm structure and values to be able to pull if off where both the firm and the clients come out winners in the end. And I think that’s what Vanguard has done so extraordinarily well.

People spend so much time on the needless active vs. passive debate that it can overshadow the fact that Vanguard is one of the most successful financial companies in history. They’ve also done things the right way and put their clients first. In an age where everyone hates “Wall Street” and “bankers” I think Vanguard is a good model for everything that is right in finance.

My working theory is that, because of the Internet and social media, nothing is properly rated anymore. Despite almost completely taking over the asset management industry over the past few years and having just shy of $4 trillion under management, I still think Vanguard is highly underrated.

The entire podcast is worth a listen for more about Vanguard’s success and their values:
MiB: Bill McNabb, Vanguard Group

McNabb will also be providing a keynote speech at our Evidence-Based Investing Conference next month. There are still a few tickets available, with a discount at Barry’s site:
The Evidence-Based Investing Conference