Can Vanguard Become Too Big?

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mickeyd
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Can Vanguard Become Too Big?

Post by mickeyd » Tue Mar 04, 2014 4:20 pm

I have never thought about VG becoming too big or too small. Evidently others have. I'll keep an eye on it and make sure to consider another investment firm when I need to invest my second billion dollars.
Other prominent advisors, including financial theorist William Bernstein and Rick Ferri of Portfolio Solutions, say they envision Vanguard with a 30% to 40% market share by 2030.

Bogle himself - who no longer has an active role in Vanguard management, but is president of the Vanguard-funded Bogle Financial Markets Research Center - says he thinks gaining a percentage point a year of market share will be difficult to sustain; he offers a "best guess" of a 25% share in 2030.
Bernstein worries that Vanguard's size is a concern. He points to a phenomenon known as "normal accidents," which occur when systems become so complex and tightly linked that catastrophes are inevitable. (Think about the fears leading up to the Fed rescue of AIG, for instance.) Normal accidents are especially prone to occur when a system becomes dominated by a single or a few large organizations.

And both Rawson and Bernstein caution that there is always a danger that Vanguard will make some decisions on behalf of stakeholders other than its investors. Rawson cites the Vanguard Russell 2000 ETF (VTWO) as an example: It was launched to meet advisor demand, he argues, but didn't have a clear benefit for the investor. The fund has languished, and now has roughly $354 million in assets - relatively small by Vanguard's standards.
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Re: Can Vanguard Become Too Big?

Post by abuss368 » Tue Mar 04, 2014 4:52 pm

Interesting. Thank you for sharing. I have watched Mr. Bogle note this recently in his interviews.
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G-Money
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Re: Can Vanguard Become Too Big?

Post by G-Money » Tue Mar 04, 2014 5:04 pm

Disappointed that the article parrots the misconception of Vanguard being a not-for-profit. This has been discussed before, and it's just not so. It has a unique corporate structure, but it is not a not-for-profit.

Would have liked to see a specific example of a "normal accident" that could occur if Vanguard becomes "too big."

I'd be more concerned that if Vanguard got "too big" (think near monopoly), it might be tempted to increase its management costs. But I think we're a long way from that happening.
Don't assume I know what I'm talking about.

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Re: Can Vanguard Become Too Big?

Post by chaz » Tue Mar 04, 2014 5:07 pm

No mistakes with index funds.
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Re: Can Vanguard Become Too Big?

Post by Buysider » Tue Mar 04, 2014 5:26 pm

Disappointed that the article parrots the misconception of Vanguard being a not-for-profit. This has been discussed before, and it's just not so. It has a unique corporate structure, but it is not a not-for-profit.
Hmmm, the terms have meanings, but in common useage, Vanguard, like a credit union or mutually owned institution are "not for profits". Vanguard is not run to generate profits for its owners. It is owned in directly by its investors, any profits are reflected in lower operating costs, so, at least by my definition it is a not for profit corporation.
Would have liked to see a specific example of a "normal accident" that could occur if Vanguard becomes "too big."
At many investment firms there are error accounts that pay when a firm makes a mistake. Sometimes traders buy when they mean to sell, sell 10,000,000 shares instead of 10,000 shares, etc. The firms have to make up for any short falls . As firms get bigger, the size of these errors grow as well. I'll give one example from a firm I used to work at - for 3 weeks, 401k contributions from 500,000 investors across the country failed to be invested in the mutual funds they had selected due to a systems and bank change over. Call it $500 million in contributions. The stock market was up about 5% in that 3 week period, the bond market was up 2% or so. The firm had to make the investors whole from the period they took the money - $500m x about 3.5% in foregone returns = $17.5m. Not an insignificant amount of money. Now if Vanguard made that same mistake, and the number was $10 billion and the market went up 10% ... ouch, our expense ratios would be going up to pay for that mistake ...

Of course there are lots of systems and redundancies that exist to make sure accidents never happen ... :oops:

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Re: Can Vanguard Become Too Big?

Post by joe8d » Tue Mar 04, 2014 7:24 pm

Disappointed that the article parrots the misconception of Vanguard being a not-for-profit. This has been discussed before, and it's just not so. It has a unique corporate structure, but it is not a not-for-profit.
I believe VG is considered to be " Client Owned "
All the Best, | Joe

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Re: Can Vanguard Become Too Big?

Post by ERMD » Tue Mar 04, 2014 9:20 pm

i've wondered what would happen, economically, if everyone owned vanguard index funds tomorrow. doesn't the market depend on the gamblers to some extent? it's a pretty delicate ecosystem.
between scotch and nothing, i'll take scotch. -- faulkner

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G-Money
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Re: Can Vanguard Become Too Big?

Post by G-Money » Tue Mar 04, 2014 9:26 pm

joe8d wrote:
Disappointed that the article parrots the misconception of Vanguard being a not-for-profit. This has been discussed before, and it's just not so. It has a unique corporate structure, but it is not a not-for-profit.
I believe VG is considered to be " Client Owned "
The two concepts are not the same.
Don't assume I know what I'm talking about.

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Re: Can Vanguard Become Too Big?

Post by Bill Bernstein » Tue Mar 04, 2014 9:50 pm

Like anything else, the word "nonprofit" is a matter of definition. In some sense, I suppose, you can say that "profits" accrue to two groups:

1) Vanguard's customers. But that doesn't fly: profits have to be made *from* customers' revenues.

2) Its executives. There is, I admit, little transparency about executive salaries at the group. But it's pretty widely appreciated in the industry that if you want to make a lot of money working for an investment company, Vanguard is the last place you should go. I'm sure the president of the Red Cross makes a very nice salary, but no one would call it a for-profit. People most often go to work for Vanguard for two joint reasons: because they love finance and sumultaneously want to be able to look themselves in the mirror.

Re. Charles Perrow's concept of "normal accident," again, almost by definition, is that they're nonpredictable. But it's not hard to imagine how an organization with thousands of employees handling trillions could drop even a relatively tiny ball somewhere and cause a systemic crisis.

Bill

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Re: Can Vanguard Become Too Big?

Post by joe8d » Tue Mar 04, 2014 9:56 pm

G-Money wrote:
joe8d wrote:
Disappointed that the article parrots the misconception of Vanguard being a not-for-profit. This has been discussed before, and it's just not so. It has a unique corporate structure, but it is not a not-for-profit.
I believe VG is considered to be " Client Owned "
The two concepts are not the same.
Say What !!! Check the VG website.
All the Best, | Joe

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in_reality
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Re: Can Vanguard Become Too Big?

Post by in_reality » Wed Mar 05, 2014 3:00 am

I do worry about Vanguard's influence. This isn't as crazy at it seems.

Client owned means Vanguard clients will be safe. Vanguard though limits who it's clients can be. Vanguard turns away Expats and I think it can honestly be said Vanguard doesn't truly have "investors" interests at heart. If they did, why would they patent their ETF/mutual fund combo? That is there to protect Vanguard as an organization.

Other companies will accept Expats as clients. Should Vanguard decide to increase their competitiveness, I worry they will lobby to make it difficult for other companies to accept us Expats as clients.

The thing is, I know very well that since I am living in a country that has strict laws and where Vanguard operates that they are sensitive to legal issues. So are other companies though. Other companies facing the same challenge find a way to work with compliance and at the very least open an account under a non-solicitation basis which limits the advice they can give, but you do have access to funds. It's just that Vanguard chooses to abandon us.

So knowing that they exclude me from being a customer, and strive to patent "technology" which means non-customers won't be able to benefit from improvement in financial products, I just wonder what else they will do.

Vanguard being client owned reassures me not. If there were a clause in Vanguard executive compensation agreement that rewarded for market share, that they might try to limit what other companies can offer those of us overseas. Executives will do anything in the short-term to meet compensation targets and we all know that. So were Vanguard to perceive it is in their interest to lobby against their competitors being able to offer service to us patriotic law-abiding tax-payers overseas, then I am afraid my goose will be burnt. Not cooked because that might be tasty, but burnt.

More likely though might be Vanguard lobbying for legislation that is favorable to them for whatever reason that inadvertently closes whatever legal basis we expats have to invest.

And when Vanguard froze my accounts for being an Expat, money disappeared and they seemed to not understand what was happening. This reduces my faith in them being able to successfully manage a computer system to do what it is they want done.

Vanguard's principles have done the industry a world of good and I do benefit from their influence. At the same time, I worry about it as an organization because they are actively excluding me as a customer, working to innovate in a way only their customers can benefit from, and in my running a computer system that is prone to unexpected failures.

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Re: Can Vanguard Become Too Big?

Post by z3r0c00l » Wed Mar 05, 2014 6:44 am

Until Vanguard goes substantially international, I see their market share falling more than anything by 2030. Even ignoring the competition on the domestic front from Fidelity and others, as well as the never-ending appeal of overpriced funds and ETFs with strange strategies, and terrible 401Ks set up by businesses with no understanding of index and low ER investing. For example, a large portion of my money will wind up outside of Vanguard despite my years of know how superior their product are, simply because my company match requires that I contribute to their blah funds from ING.

A larger Vanguard strikes me as a good thing, for now, because it allows them to do what they do best anyway, lower ERs.

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Re: Can Vanguard Become Too Big?

Post by davidlukewilcox » Wed Mar 05, 2014 9:12 am

Yes. Vanguard can become too big.

All of the math that says that chasing alpha doesn't matter and you shouldn't do it depends on other people chasing alpha. If no one else is chasing alpha, then indexing becomes the wrong thing to do, and stock picking is the way to achieve maximum return.

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Re: Can Vanguard Become Too Big?

Post by Random Musings » Wed Mar 05, 2014 12:04 pm

davidlukewilcox wrote:Yes. Vanguard can become too big.

All of the math that says that chasing alpha doesn't matter and you shouldn't do it depends on other people chasing alpha. If no one else is chasing alpha, then indexing becomes the wrong thing to do, and stock picking is the way to achieve maximum return.
Human nature makes it a certainity that certain individuals will chase for alpha. Just as in other aspects of society, there is an underlying urge to "win" and sellers of product will tempt that urge. No worries there.

RM
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Re: Can Vanguard Become Too Big?

Post by hiddensee » Wed Mar 05, 2014 12:52 pm

davidlukewilcox wrote:Yes. Vanguard can become too big.

All of the math that says that chasing alpha doesn't matter and you shouldn't do it depends on other people chasing alpha. If no one else is chasing alpha, then indexing becomes the wrong thing to do, and stock picking is the way to achieve maximum return.
Exactly.

But this failure is self-correcting, since if active managers start opening up a lead people will pile money back into active managers. Collapses usually require some regulatory problem in addition.

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Re: Can Vanguard Become Too Big?

Post by manwithnoname » Wed Mar 05, 2014 1:04 pm

G-Money wrote:Disappointed that the article parrots the misconception of Vanguard being a not-for-profit. This has been discussed before, and it's just not so. It has a unique corporate structure, but it is not a not-for-profit.

Would have liked to see a specific example of a "normal accident" that could occur if Vanguard becomes "too big."

I'd be more concerned that if Vanguard got "too big" (think near monopoly), it might be tempted to increase its management costs. But I think we're a long way from that happening.
are financial institutions exempt from antitrust laws?

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Re: Can Vanguard Become Too Big?

Post by Phineas J. Whoopee » Thu Mar 06, 2014 4:30 pm

davidlukewilcox wrote:Yes. Vanguard can become too big.

All of the math that says that chasing alpha doesn't matter and you shouldn't do it depends on other people chasing alpha. If no one else is chasing alpha, then indexing becomes the wrong thing to do, and stock picking is the way to achieve maximum return.
Vanguard offers plenty of actively-managed funds, so it isn't a matter of their becoming "too big".

As always, the "what if everybody indexes" question's answer is before that could happen, pricing efficiency would break down and plenty of enterprising individuals and organizations would step in to extract free money from the inefficiently priced assets.

It's self limiting.

PJW

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Re: Can Vanguard Become Too Big?

Post by denovo » Thu Mar 06, 2014 7:26 pm

Antitrust issues?
"Don't trust everything you read on the Internet"- Abraham Lincoln

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Re: Can Vanguard Become Too Big?

Post by docneil88 » Fri Mar 07, 2014 5:02 am

davidlukewilcox wrote:Yes. Vanguard can become too big.

All of the math that says that chasing alpha doesn't matter and you shouldn't do it depends on other people chasing alpha. If no one else is chasing alpha, then indexing becomes the wrong thing to do, and stock picking is the way to achieve maximum return.
No matter what percentage of investors are indexing, the active investors will still face the uphill battle of overcoming trading, tax, and management costs that are significantly higher than the index investors face. In the long-run those increased costs are generally very difficult to overcome.

On the other hand, as the percentage of active investors decreases, the efficiency of the market will decrease, thereby increasing the performance gap between first- and third-quartile performing active managers. This gives anyone with true investing skill the opportunity to make more money, while giving those lacking in skill the opportunity to flame out in a more spectacular way. Best, Neil
Last edited by docneil88 on Fri Mar 07, 2014 5:01 pm, edited 1 time in total.

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Re: Can Vanguard Become Too Big?

Post by docneil88 » Fri Mar 07, 2014 5:17 am

While Vanguard's secular growth continues, its periods of net-fund-outflows are minimized in length and size. This increases the likelihood that 50 years from now, unrealized gains in Vanguard's low turnover index funds will be a massive percentage of the fund. And some of those gains will be 50 years old or more. This increases the likelihood of a software glitch or lost information calling into question what the correct cost basis is for long-kept assets of a fund. Best, Neil
Last edited by docneil88 on Fri Mar 07, 2014 4:59 pm, edited 1 time in total.

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Re: Can Vanguard Become Too Big?

Post by khale7 » Fri Mar 07, 2014 7:01 am

in_reality wrote:Vanguard turns away Expats..
Huh?...I am a expat and my employer (not an American firm) offers a 401k through Vanguard.

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Kevin21
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Re: Can Vanguard Become Too Big?

Post by Kevin21 » Fri Mar 07, 2014 1:29 pm

There is surely a way to be better than Vanguard, and to take their market share. Fidelity is close.

When a new firm takes on Boglehead philosophy and offers better customer service, and a more functional website --- then they too can take up market share.

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Re: Can Vanguard Become Too Big?

Post by 4nursebee » Fri Mar 07, 2014 5:51 pm

I'm not worried about it. I think of Vanguard and the like as a custodian, the business entity handling things. But it is my money. VG not gambling, leveraged, making loans, etc, none of the dangerous stuff.

There could be some rogue people, but that would be one heck of a con.
4nursebee

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Re: Can Vanguard Become Too Big?

Post by mickeyd » Sat Mar 08, 2014 2:56 pm

khale7 wrote:
in_reality wrote:Vanguard turns away Expats..
Huh?...I am a expat and my employer (not an American firm) offers a 401k through Vanguard.
What defination are we using for expat?
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Re: Can Vanguard Become Too Big?

Post by denovo » Sat Mar 08, 2014 3:16 pm

Kevin21 wrote:There is surely a way to be better than Vanguard, and to take their market share. Fidelity is close.

When a new firm takes on Boglehead philosophy and offers better customer service, and a more functional website --- then they too can take up market share.

They aren't a full brokerage, but if we are focusing on fund offerings, I don't see how Ishares Index Funds are any worse than Vanguard's.
"Don't trust everything you read on the Internet"- Abraham Lincoln

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