Vanguard CEO to pass torch

Vanguard Group chief executive Jack Brennan said yesterday that he would step down within a year, handing off to a company veteran at a critical time for their firm and the entire mutual-fund industry.

"Our clients have grown up with us and we with them," said Brennan, who will remain chairman. "We have to make sure we're adapting to meet the needs of this generation that is going to live to 100."

F. William McNabb III, 50, a 22-year company veteran with experience in all of Vanguard's businesses, will become president on March 1.

Vanguard is the fourth-largest asset manager in the world, according to Global Investor magazine. With 9,000 employees in the Philadelphia region, it has one of the area's largest payrolls.

Since Brennan, 53, became CEO 12 years ago, assets at the Malvern mutual-fund giant have soared from $239 billion to $1.3 trillion.

The leadership change at Vanguard is taking place as the company - along with the entire mutual-fund industry - is wrestling with how to serve retiring baby boomers and the need for overseas expansion to keep growing.

Brennan's move caught industry observers off guard.

"It's a surprise and a shock to everybody in the industry, considering Jack is a young 53, very aggressive, very vigorous," said Philadedelphia mutual-fund consultant Burton Greenwald.

On the other hand, Greenwald said, Brennan is preparing to hand off some of his responsibilities with Vanguard at the top of its game. For example, last year, Vanguard topped rival American Funds by attracting the most new money into its funds.

"It's a great time to step back from Jack's point of view," Greenwald said.

As chairman, Brennan will work on strategy. He declined to discuss specific issues but said the company must continue adapting to its largely baby-boomer clientele while meeting the needs of the next generation.

Brennan noted that he had had a long run at the company, serving as president since 1989 and taking over as CEO in 1996. He joined Vanguard in 1982.

"I think that change is a good thing for organizations," Brennan said. "A sure bet like Bill makes me feel better because I love Vanguard."

Alfred M. Rankin Jr., the lead independent director on the Vanguard board, said in a statement that Brennan's contributions to Vanguard over the last 26 years were "in many respects, immeasurable."

McNabb, whom Rankin and other Vanguard directors chose to succeed Brennan, joined Vanguard in 1986 and is now a managing director overseeing Vanguard's institutional and international businesses, which have $700 billion in assets under management.

McNabb grew up in Upstate New York and Boston and has lived in the Philadelphia region for nearly 30 years, since coming to earn an M.B.A. at the University of Pennsylvania's Wharton School.

He and his wife have four children ages 16 to 25. He lives in Devon.

John Quelch, a Harvard Business School professor who six years ago wrote a case study of Vanguard's marketing strategy, called McNabb a "humble but highly effective executive."

McNabb participates in many of Quelch's Harvard classes on that case study and answers questions about the case and Vanguard's progress, Quelch said.

His "leadership style is quiet and understated, never loud or flashy. [Vanguard founder] Jack Bogle and Vanguard's mutual-fund owners can sleep easy knowing that Bill will be leading 'the crew,' " Quelch said, using Vanguard's word for staff members.

Greenwald, a Philadelphia mutual-fund consultant, said Vanguard's overseas business, which Vanguard started in 1996 and now has $110 billion in assets, had to be a top priority under McNabb. He said the company was behind competitors Franklin Templeton and Fidelity Investments in attracting business outside the United States.

Geoffrey Bobroff, a mutual-fund consultant in Providence, R.I., said the big question is how to serve the baby- boom generation as it starts living off the money accumulated in mutual funds.

"No one has quite found the right formulation," he said.

McNabb, a Dartmouth College graduate, said a big challenge for him, as it has been for Brennan during his tenure, is changing with the market while staying focused on delivering low-cost, diversified investments with a long-term orientation.

"Who we are won't change, I hope," said McNabb, "but how we do things will probably evolve in ways I can't even imagine."