PhillyDeals: Vanguard focuses on growth despite market

Almost alone in the mutual fund business, Malvern-based Vanguard Group Inc. gained new customers during last year's investment-market meltdown. And it grew faster than any major rival during this year's partial recovery.

Vanguard, the largest mutual fund company and Chester County's largest employer with nearly 10,000 workers, also avoided cutting people, unlike competitors such as Fidelity, American Funds, T. Rowe Price Group Inc., and SEI Investment Co.

To be sure, the recovery doesn't look too convincing to F. William McNabb, who was promoted last fall at the start of the economic collapse to replace John J. Brennan, becoming the third chief executive of the group founded by low-cost index-fund promoter John Bogle.

"The real economy is still very much a question mark," McNabb told me in his office at Vanguard's brick headquarters complex. To shore up profits, U.S. companies have been cutting workers and costs. McNabb says there's not much left to cut - leaving the big question unanswered: "When are we going to see growth?"

Yet what's bad for speculative investors and traders tends to be good for Vanguard and its menu of low-fee stock-index, bond, and money market funds, and exchange-traded funds, notes Gus Sauter, chief investment officer.

Vanguard attracted a net $84 billion in new money last year, at a time when the other top-10 mutual fund managers were losing business or gaining only a fraction of Vanguard's cash flow, according to data collected by Strategic Insight, a New York research firm.

Vanguard has brought in an additional $76 billion through September this year, growing faster during the market recovery than any other major fund group, according to Morningstar Inc. data. The growth includes Vanguard's expanding list of exchange-traded funds - stock and bond index funds that trade like individual stocks - that have been popular with a wave of fee-based investment advisers leaving big funds such as Merrill Lynch & Co. Inc. and Morgan Stanley to set up their small firms, says Philadelphia mutual fund consultant Burton J. Greenwald.

Vanguard had to run that hard just to stay in place: The group's total fund value fell to $1 trillion, from $1.3 trillion, during 2008, as stocks, real estate, and other assets lost value. The combination of recovering asset prices and new money from customers has brought the total back to about year-end 2007 levels. Still, the depressed market cut Vanguard's income from fund fees, and the group stopped work on its long-planned Uwchlan office center and other projects.

As markets fell last fall, McNabb mobilized top managers in three-times-daily strategy sessions. "The biggest decision we made was not to cut back" on jobs, but to instead expand key marketing and communications efforts, he said.

In the previous investment market slowdown, during the early 2000s, I wrote of how Vanguard workers told me the company increased firings "for cause," which had the effect of cutting staff - and raising anxiety - while allowing Vanguard to boast it hadn't laid anybody off.

Instead, McNabb told me, "what we tried to do this time was find the shifts in demand," and move workers into new initiatives and special projects - answering a flood of online customer questions, boosting Internet capacity, reaching out to nervous customers with online letters and videos explaining the meltdown, and urging customers to stay set on their long-term investment goals.

Brennan ran Vanguard like a demanding coach building a team. Critics privately called him prickly, impatient, abrasive. But McNabb says Brennan's coaching approach formed a fast-moving, close-knit leadership team.

Brennan "really nurtured our ability to debate with each other and argue and come up with constructive challenges. He really did a phenomenal job setting the rules of engagement," McNabb told me. "When it's done, it's done, and everyone moves forward together."

Why does Vanguard, owned by investors and purportedly managed for their best interests, work so hard to grow? "Growth is good," says Mike Miller, managing director for planning and development. "It's good for our clients. By bringing in additional assets, we can keep driving down the costs."

It's also good, he said, for managers and workers: "A company that's contracting is a company that, in some sense, is dying. Opportunities for your employee base are not going to be there. We need to replenish the asset base for our crew to grow and develop.

"We want to be better, not necessarily bigger. But if we are better, we will be bigger."