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Changing of the Vanguard
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December 14, 1998: 5:20 p.m. ET
Vanguard 500 Index fund may surpass Fidelity's Magellan as nation's largest
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NEW YORK (CNNfn) - Call it revenge of the index fund.
The Vanguard 500 Index mutual fund, which mirrors the performance of the Standard and Poor's 500 index, could surpass Fidelity Investments' Magellan Fund as the largest mutual fund in the United States by the end of next year or early in the year 2000.
Market watchers say the rapid growth of Vanguard's 500 Index Fund (VFINX) reflects the increasing popularity of "passively" managed funds. A "passively" managed fund -- also known as an index fund -- buys and holds the securities that represent its unmanaged target index, or benchmark.
According to Standard & Poor's, as much as 8 percent of the U.S. stock market's $9 trillion in total capitalization is indexed today, up from 7 percent of $4 trillion five years ago. The majority of those monies are institutional -- retirement funds, pensions, etc -- but a significant amount belongs to individual investors invested in mutual funds.
About 20 percent of the money going into mutual funds in 1998 -- roughly $27 billion -- went into index funds. Index funds accounted for less than 3 percent of all mutual fund investments in 1994.
The gap separating Fidelity's Magellan Fund and the Vanguard 500 Index Fund has been narrowing at a steady clip over the past three years. As of last Friday, about $7 billion in total managed assets separated the two giant funds, compared with approximately $14.7 billion at the end of last year and roughly $23 billion at the end of 1996.
"We expect the Vanguard 500 Index Fund to surpass the Magellan Fund in terms of net managed assets by late next year or early 2000," said Morningstar's Russell Kinnel.
One of the major reasons that Vanguard's 500 Index Fund has been able to catch up to the Fidelity fund in terms of net managed assets is that Magellan (FMAGX) has been closed to new investors since September of 1997. The fund can now be purchased exclusively by existing shareholders and through employers' retirement plans.
News of the tightening race between Vanguard and Fidelity was reported Monday by the Wall Street Journal.
Index funds present several advantages over actively managed funds. Investors pay less in management fees, paying roughly 20 cents a year per $100, versus a fee of anywhere from $1 to $2 for actively managed funds. By definition these investments do not lag behind the overall market. This means that over long periods of time they almost can't lose.
Although the fund has boasted impressive returns in the past three years, Vanguard CEO Jack Brennan urges investors to pursue realistic and balanced long-term investing strategies. "Indexing isn't invulnerable," he told investors in the company's January statement. "Investors who have enjoyed the bounty of the S&P 500 index should consider that while large-cap stocks have led the market's parade in the past few years, this trend won't last forever."
For the year ended Oct. 31, the Vanguard 500 Index Fund had yielded a return of 21.94 percent while Fidelity's Magellan fund yielded a one-year, non-load-adjusted return of 23.29 percent for the year ended Nov. 30.
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