Why Vanguard Is My Favorite Mutual Fund Company

Greedy financial institutions have gotten a lot of bad press lately.  From AIG to Goldman Sachs to Citigroup, all have been criticized for putting profits ahead of the interests of their customers, employees, and society as a whole.  Now I don’t particularly have anything against this behavior;  after all, management ultimately is charged with maximizing shareholder value, but occasionally along comes a company that truly bucks the trend and opts to put the welfare of its customers above corporate profits.  The company of the hour, of course, is Vanguard.

A Unique Ownership Structure

Vanguard is unique among mutual fund companies in that it is structured so that the mutual funds it manages actually owns the company.  Under this structure, each Vanguard mutual fund contributes a shared amount of capital towards shared administrative fees, management, and marketing services.  Vanguard, then, is in the unique position of being owned by its customers.  The upshot of this is that since Vanguard’s shareholders and customers are one and the same, there is no inherent conflict of interests.  Thus, Vanguard is able to serve both masters very well over the long run, consistently passing on savings from economies-of-scale directly to their customers/owners and offering quality products at rock-bottom prices.

The Latest Example Of Good Corporate Stewardship

One of the most deadly enemies of high mutual fund returns, especially with actively-managed mutual funds, is asset bloat.  Simply put, when a high-performing fund attracts too many dollars, the fund manager inevitably reaches a point where he can no longer invest that extra money profitably.  Perhaps he’s run afoul of certain corporate anti-takeover laws, SEC regulations, or has simply run out of good investment ideas before running out of cash.  Whatever the case may be, rapidly growing funds tend to become too large and lose their mojo after a while.  Indeed, one of the hallmarks of a superior mutual fund is a small asset base.

There are a few ways to deal with asset bloat, but by far the most effective is to close the fund to new investors.  Since closing a popular fund also tends to lower profits, most mutual fund companies are understandably loath to take such a drastic step.  Not Vanguard.  In fact, Vanguard often closes too-hot funds and even gives press releases warning investors not to get too aggressive during bull markets (as it warned recently that 2009’s strong returns are unlikely to persist indefinitely).  Just a day after warning against “Irrational Exuberance” in the market in general and its Capital Value Fund (VCVLX) in particular, Vanguard opted to close Capital Value (which has returned a staggering 76.3% YTD) to new investors in an effort to cool things down a bit.  Even more impressive is the fact that Capital Value only has approximately $742 million dollars under management at the time of this writing, which really isn’t a whole lot by industry standards.  Vanguard’s willingness to recognize and take early action to head off trouble before asset bloat begins to hurt the fund’s returns shows admirable restraint in a situation where Vanguard could easily look the other way while making a pretty penny at the expense of its customers.

And that is why Vanguard is my favorite mutual fund company.