Morningstar - Q2 2022 - 44

Strategies
The Case for Vanguard
Why the firm still embodies founder
Jack Bogle's spirit.
Research
48
Interval Funds Offer a Way Into
Private Markets
Quant U
50 Me Versus the Kids
Best Ideas
55 Manager: Deep-Value Skill
56 Passive: Broad Base at a Low Cost
57
Equity: A Stabler Take on Housing
RESEARCH
Alec Lucas
New Vanguard doesn't look much like old
Vanguard. Whether it's selling advice,
launching high-conviction active funds only for
advisory clients, or offering private equity,
it is different.
What's also different is that many longtime
observers have begun to question the company.
Morningstar's John Rekenthaler proposed
that Vanguard has lost its way,1
while The Wall
Street Journal's Jason Zweig charged it in at least
one instance with failing the small investors
whom Vanguard founder Jack Bogle championed.2
One financial advisor even suggested that
Bogle would roll over in his grave if he knew
what was happening.3
While critics have drawn attention to issues
that would have irked Bogle and problems that
he himself had trouble taming, such as
customer service missteps, Vanguard still reflects
his image more than tarnishes it. Indeed, it's
still a mission-driven company whose competitive
zeal redounds to investors' benefit, and
that suggests a positive outlook for Vanguard.
Negative sentiments rest on two pillars: industry
rivalries' corrosive influence and present-day
Vanguard falling short of its former self. Despite
some merit, both pillars struggle to bear the
weight placed upon them.
Critics Are Wrong About Corrosive Competition
Owned by its U.S. funds and indirectly by their
shareholders, Vanguard has provided investors
with strong investment options for fees that keep
dropping as the firm grows. Rivals that once
scorned Vanguard's pioneering indexing efforts
now offer their own passive strategies, and the
biggest have sought to match if not undercut
Vanguard on fees for broad market exposure and
single solutions like target-date funds.
True, these price wars recently led to some
collateral damage. When Vanguard lowered the
investment minimum for an institutional version
of its target retirement series, money flooded
in from a more expensive retail sibling, triggering
big 2021 capital gains distributions for the
remaining taxable investors. Vanguard should have
anticipated this problem and either avoided it
or warned investors about it.
But Vanguard has also saved its investors lots of
money in taxes by eliminating index funds'
capital gains (using the exchange-traded fund
share class and in-kind redemptions). And
overall, lower costs have been great for investors,
while the competition hasn't cost Vanguard
its integrity.
Consider that only BlackRock's BLK new U.S.
retail money flows can compare with Vanguard's,
thanks to its leadership in investors' current
vehicle of choice, the ETF ( EXHIBIT 1 ). Also,
for two years in a row, BlackRock and its iShares
business have edged Vanguard, with others
1 Rekenthaler, J. 2021. " Has Vanguard Lost Its Way? " Morningstar.com. Dec. 13.
2 Zweig, J. 2022. " The Huge Tax Bills That Came Out of Nowhere at Vanguard. " The Wall Street Journal. Jan. 21.
3 Carlson, D. 2021. " As Vanguard Pushes Into Private Equity, Some Fans Get Queasy. " MarketWatch. Dec. 6.
44
Morningstar Q2 2022

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Morningstar - Q2 2022

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