The index fund pioneer’s low fees have driven down costs but is its success a cyclical phenomenon? ... It passed the $3tn mark in assets under management globally last year, as international growth spurted alongside the US; today the total is $3.4tn. ... if there are vulnerabilities, they are in three areas: the shift to passive investing may prove to be partly a cyclical phenomenon; Vanguard’s move into giving financial advice could cause friction; and regulators could decide to step in to stop the firm becoming too big to fail. ... Instead of having outside shareholders, Vanguard is owned by its funds, which means that instead of having to charge fees high enough to generate a profit for shareholders, it operates “at cost” and charges only enough to cover expenses and business investment. ... The Financial Stability Board, based in Basel, Switzerland, has suggested designating every fund with over $100bn in assets as a “systemically important” organisation and subjecting them to tougher oversight and perhaps other requirements, all of which would raise costs.
The opinions of experts concerning the future are accorded great weight ... but they’re still just opinions. Experts may be right more often than the rest of us, but they’re unlikely to be right all the time, or anything close to it. ... A lot of people's lives would be more tranquil and more productive if they accepted that what the media says about an upcoming event - and whether you watch of not - won't have any impact on the outcome. ... Today many analysts seem preoccupied with central bank behavior, government actions, trends in interest rates and currencies, and the movement of markets, as opposed to the fortunes of individual companies. … Most people don’t want to tempt fate by saying things will go well forever, and in fact they know they won’t. It’s just that they can’t decide what it is that will go wrong. The truth is that while I can enumerate them, the obvious candidates (changes in oil prices, interest rates, exchange rates, etc.) are likely to already be anticipated and largely priced in. It’s the surprises no one can anticipate that would more markets most if they were to happen. But (a) most people can’t imagine them and (b) most of the time they don’t happen. That’s why they’re called surprises. ... People began to ask me what inning we’re in during the financial crisis of 2008, and they’ve continued ever since.
Investors are shifting their investment allocations from active to passive management. This trend has accelerated in recent years. The investors who are shifting from active to passive are less informed than those who stay. This is equivalent to the weak players leaving the poker table. Since the winners need losers, this can make the market even more efficient, and hence less attractive, for those who remain. If you can’t identify the patsy, or weak player, it’s probably you. ... Passive management has lower costs than active management and hence delivers higher returns per dollar invested than active management does in the aggregate. However, passive management introduces the possibility of market distortions, including crowding and illiquidity. Exchange-traded funds, in particular, are worth watching closely because of their explosive growth and high trading volume. ... Four drivers have led to the development of the mutual fund industry and, more recently, to the shift toward passive investing. These include regulation, the market environment, technology, and the balance between informed and uninformed investors.