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Fund Spy

How Vanguard Found Itself on Top in the 'Lost Decade'

Offering the right funds at the right time and keeping its nose clean helped in a tumultuous decade.

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Many call it the lost decade. It began with the Internet boom and bust; ended with a roaring housing and credit market bubble that imploded catastrophically; featured a mutual fund trading scandal and the rise of ETFs in between; and left most equity fund investors with little to show for their pains on Dec. 31, 2009. During all the turmoil, a lot of investors lost their faith in some big fund families, including Putnam, Morgan Stanley, and Janus, which saw the largest net outflows for the decade. Yet fund investors still seemed to trust Vanguard, sending the family money through bull and bear markets, controversy and calm. Why? A close look at the family's fund flows offers some answers.

The story told by Vanguard's fund flows is remarkable but also highly correlated with the market environment. For instance, after investors grew wary of large-cap stocks in the early 2000s, Vanguard's  Total Stock Market Index (VTSMX) appealed to investors wanting broader stock market exposure that included small- and micro-cap stocks. In addition, in the wake of the tech bear market and the mutual fund trading scandal, some investors also grew disenchanted with active management and turned to broad, one-stop equity and bond index funds--Vanguard's forte. As concerns about inflation grew, investors sought out Treasury Inflation-Protected Securities funds, of which Vanguard offered the cheapest option. Then, during the volatile markets of the past couple years, risk-averse investors sought refuge in bond funds, and Vanguard again offered the cheapest access to bond indexes.

So, you can attribute some of Vanguard's success to its broad lineup of funds. It has had one for just about every season. Equally important, however, is that its funds generally have done well and Vanguard has avoided serious scandal. Of the funds in its lineup that have been around for at least a decade, about 74% have 10-year records that rank in the top half of their category. While other fund families are still trying to live down their involvement in the market-timing scandal and other controversies, Vanguard, on a relative basis, has emerged looking like the industry Eagle Scout. Even as the family has grown it has been pretty good about closing hot funds, keeping fees low, and avoiding trendy funds.

David Falkof does not own (actual or beneficial) shares in any of the securities mentioned above. Find out about Morningstar’s editorial policies.