Vanguard's 2017 Prediction: A Record $350 Billion In New Cash

By Sarah Krouse Features Dow Jones Newswires

SCOTTSDALE, Ariz. -- Vanguard Group quadrupled in size over the last eight years. It is about to get even bigger.

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The money management giant is on pace to collect a record one-year total of $350 billion in investor cash by the end of 2017, Chief Executive F. William McNabb III said in an interview Wednesday following a shareholder meeting in Scottsdale, Ariz. That estimate hasn't previously been disclosed.

"It's an extraordinary number," Mr. McNabb said.

The expected haul, which would exceed Vanguard's prior record by $27 billion, reinforces an industrywide shift away from money managers who specialize in handpicking winners.

Vanguard has become one of the main beneficiaries of the growing preference by investors for lower-cost, so-called passive funds, which track the performance of indexes. It pioneered the index fund for retail investors 40 years ago.

Vanguard's outsize heft was a topic of discussion at its Scottsdale meeting Wednesday, the first firmwide gathering for shareholders since 2009. One Vanguard Group shareholder marveled at the wave of new investor cash the money manager has attracted in recent years and asked executives if they are taking any precautions to make sure that success doesn't go to their heads.

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"It is probably the thing we worry most about at Vanguard," Mr. McNabb told the shareholder. "That success can breed complacency."

The last time shareholders came together for a firmwide meeting Vanguard's assets under management were $1.1 trillion and money going into its passively managed funds accounted for about 78% of total net inflows during 2009.

Now its assets are $4.8 trillion and passively managed funds accounted for 91% of inflows through the first 10 months of this year. Net flows into Vanguard funds so far this year accounted for about 51% of total net flows into all U.S. mutual funds and exchange-traded funds, according to Morningstar Inc.

"We're a very different company than we were 10 years ago," Mr. McNabb said in the interview.

Some customers have complained of longer call wait times while Vanguard's assets ballooned. Mr. McNabb said Wednesday the company has added 1,200 customer service staff members to a 5,000-person team in the last year. The firm's processing backlog is down and wait times are shorter, according to Mr. McNabb.

"We just didn't see the continued cash flow" that Vanguard eventually received, he said.

Shareholders in most funds approved six management proposals Wednesday, the company said, including the election of trustees and permission to hire or fire internal managers for the majority of the company's 195 funds. The proxy vote was the largest ever by a mutual-fund firm, Mr. McNabb told shareholders.

Vanguard reserved a large beige-walled conference room at a Doubletree Resort that was divided by a collapsible wall. The first room had about 300 chairs and a second had additional rows of seating, should more clients than expected attend. It turns out the extra room wasn't needed, as 205 shareholders showed up.

Customers made their way gradually to seats and filed one-by-one to microphones on either side of the conference room to ask questions. Executives answered from wooden chairs on a stage with a curtain behind them lighted with red light.

Retired insurance industry executive Robert Hestekind, 78, arrived from Northeast Mesa, Ariz., to learn more about the proposals for which the money manager sought shareholder approval and get a glimpse of Vanguard's founder.

"I was hoping maybe we'd get to see Jack Bogle," he said. "He's as big as Warren Buffett in my estimation."

But Mr. Bogle, 88, who founded Vanguard in 1975, wasn't in attendance at Vanguard's meeting. Mr. Bogle received an ovation at this year's Berkshire Hathaway annual meeting, where Berkshire Chief Warren Buffett said the Vanguard founder "has probably done more for the American investor than any man in the country."

One Vanguard Group shareholder asked executives on stage at the meeting if the company's mutual structure might change. Mr. McNabb's reply: "The short answer is no."

Mortimer J. "Tim" Buckley, who is set to succeed Mr. McNabb in January, chimed in, too. "I'll second that," Mr. Buckley said.

Mr. McNabb said the structure, in which the firm is owned by its fund shareholders, is "the single biggest source of our distinct advantage." He credited Mr. Bogle for setting up the company that way.

Tom Kenney, a retiree who lives near Phoenix and used to work in advertising, came to the meeting to hear Vanguard's view of financial markets. "It's been going up and up and up," Mr. Kenney said of markets, wondering when it might start to go "down, down, down."

Write to Sarah Krouse at sarah.krouse@wsj.com

(END) Dow Jones Newswires

November 15, 2017 16:42 ET (21:42 GMT)