Investment Management

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The Vanguard Group Strategy Discussion Villanova
University
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The Vanguard Group Corporate Mission
To be the world's highest-value provider of
investment services.

• Since our founding in 1975, Vanguard has grown to
  become one of the worlds largest pure no-load
  mutual fund companies.
• Vanguard services both individual (retail) and
  institutional clients worldwide.
• In addition to mutual funds, Vanguard offers
  brokerage services, variable and fixed annuities,
  and 529s, as well as financial planning, asset
  management, and trust services.
• 10,000 employees in three locations in US (PA,
  NC, AZ)

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How Mutual Funds are Priced

• Loads Sales charges
  to Brokers
• 12b-1 Fees Ongoing fees to
  Brokers to support marketing
• Expense Ratios Ongoing costs to
  Mutual Funds to cover money management,
  administration and produce profits

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The Mutual Fund Industry in 1975

• Most load funds sold by brokers
• Most funds had high expenses
• Early signs that investors were comfortable going
  direct
• Tax incentives to save were emerging

What opportunity did Vanguard see?
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A Unique Ownership Structure
Vanguard is the only client-owned mutual fund
company in the world, delivering unmatchable
value to a single set of owners.
Vanguard Ownership Structure
Traditional Ownership Structure
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Cost Advantage
Vanguards current cost advantage is 1.1. One
hundred and ten basis points on 690 billion in
assets under management translates into
approximately 7.6 billion in savings passed on
to Vanguard shareholders.
Percentage of Net Assets
All funds 1.36
0.97
efficiency and owner compensation
0.59
Vanguard 0.25
Confidential
Assets under management are as of December
31, 2003. Sources The Vanguard Group,
19801987 Weisenberger Panorama and Lipper
Inc., 1988 forward.
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Vanguard Strategic Strengths

• Clarity of market position
• Outstanding long-term performance
• Award-winning products and services
• Cost position
• Diversity of client base
• Investment management approach
• Image and reputation

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The Result..a 2 Position in the Industry
Vanguard Total Assets
690 billion
288 billion
402 billion
Assets under management are as of December
31, 2003. .
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Our Competitors Today
Fidelity Investments
TIAA-CREF (Retirement Market)
Discount Brokers (Schwab e-Trade)
Big Banks (Wachovia)
T. Rowe Price
Big Brokers (Merrill Lynch Edward Jones)
Broker Sold Funds (American Funds, Putnam, AIM)
Insurance Companies
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Major Strategic Inflections
Index Funds?
1975
1980
1985
1990
1995
2000
2004
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Major Strategic Inflections
Index Funds?
Corporate 401k Market?
1975
1980
1985
1990
1995
2000
2004
Discount Brokerage?
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Major Strategic Inflections
Manage Fixed Income Internally?
Index Funds?
Corporate 401k Market?
1975
1980
1985
1990
1995
2000
2004
Discount Brokerage?
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Major Strategic Inflections
Manage Fixed Income Internally?
Index Funds?
Corporate 401k Market?
Pay for Distribution?
1975
1980
1985
1990
1995
2000
2004
Discount Brokerage?
Offer Non-Vanguard Funds?
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Major Strategic Inflections
Manage Fixed Income Internally?
Index Funds?
Corporate 401k Market?
Pay for Distribution?
Give Advice?
1975
1980
1985
1990
1995
2000
2004
Discount Brokerage?
Offer Non-Vanguard Funds?
Role of the Internet?
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Major Strategic Inflections
Manage Fixed Income Internally?
Index Funds?
Corporate 401k Market?
Pay for Distribution?
Exchange Traded Funds?
Give Advice?
Local Offices?
1975
1980
1985
1990
1995
2000
2004
Discount Brokerage?
Offer Non-Vanguard Funds?
Role of the Internet?
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The Role of Corporate Strategy

• Facilitate Planning
• Evaluate New Opportunities
• Analyze the Competition

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What is Strategy to Vanguard?

• Defines how an organization is going to compete
  Porter
• Strategy
• Creates and protects a differentiated customer
  value proposition
• Focuses resources
• Is as much what not to do as what to do

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The General Strategic Process
2. External Forces
3. High Level Evaluations
1. SWOT
Whats influencing our position?
Does it fit with our goals?
What are our capabilities?
6. Decisions and Consensus
5. Financial Analysis
4. Deep Dives
How will it work?
Will it pay off?
Does everyone agree?
7. Business Plans
8. Implement
Make it happen
Make it formal
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Strategic Alignment
Does the product serve an unmet client need?
Is the product aligned With Vanguards goals?
Can we execute?
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Some Common Strategy Pitfalls

• No clear direction
• Strategy is unsustainable (competitors can copy)
• Stuck in the middle (nothing unique)
• Too much to too many customers
• Waffling strategies
• Knee jerk decisions

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Porters Five Forces (plus one)

• Insurance Companies
• Technology Providers
• Walmart

Potential Entrants

• Fund managers
• Regulatory agencies
• Technology providers

Industry Competitors
Suppliers
Buyers

• Retail investors
• Institutional plan sponsors

Rivalry Among Existing Firms
Substitutes
Complements

• ETFs
• Separate Accounts
• Hedge Funds

• Advice

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Current Forces Shaping The Industry

• Mutual Fund scandals favor few clean firms
• Threat of over regulation
• Distributors growing power
• Industry convergence
• Product complexity
• Aging Baby Boomers

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Aging Baby Boomers

• Demographic shift
• In 2010, 40 of the population will be 45 years
  and older versus 30 in 1990.
• Currently there are 2.8 million households that
  have 1 million in assets
• 90 of these are 45 years and older
• Rollover assets are projected to increase at
  11.3 annual growth rate (216B in 2005)
• What is the impact on the mutual fund industry?
• What should Vanguard do?

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Internal Perspective SWOT Analysis
Low cost advantage High integrity and reputation
No local presence No payment for distribution
Strengths
Weaknesses
Opportunities
Threats
Advice Turnkey Services
Financial Advisors Diversified financial firms