US investors are flocking to index fund managers in droves. In the first three months of this year, Vanguard, America’s second biggest mutual fund company, took in almost twice as much investor dollars as its nearest competitor.
According to US-based research house Financial Research, Vanguard’s funds at-tracted a net US$18 billion in the three months to March 31, 27 per cent ahead of the same time last year. The figures put the group on pace to attract even more money to its stock and bond fun
US investors are flocking to index fund managers in droves. In the first three months of this year, Vanguard, America’s second biggest mutual fund company, took in almost twice as much investor dollars as its nearest competitor.
According to US-based research house Financial Research, Vanguard’s funds at-tracted a net US$18 billion in the three months to March 31, 27 per cent ahead of the same time last year. The figures put the group on pace to attract even more money to its stock and bond funds than 1998 when a record US$48.9 billion was invested.
So what is attracting investors to index funds? Is it the relatively low manage-ment costs? Is it the simplicity?
While management expenses and simplicity do have roles to play, the primary rea-son index fund managers are bringing in the bucks is that they are outperforming their active manager competitors. Much like their Australian counterparts, US investors are often slaves to past performance, so when a fund performs well, it often immediately attracts big inflows.
Most analysts consider the performance success of US index funds has been due to the amazing bull run of the US stock market over the past 10 years. They argue that active managers show their true colours when the market takes a turn for the worse.
Much to the horror of most active managers, very few managers have managed to outperform the popular S&P 500 index last year. In fact, according to an article in the New York Times, 70 per cent of mutual funds failed to outperform the S&P 500, the index the vast majority of US fund managers use as their performance benchmark.
Mind you, the S&P 500 has had a pretty impressive run over recent year, up 170 per cent in the four years to the end of last year.
Analysts in Australia say the reason index funds have not had the same success as those in the US is the fact that the benchmark All Ordinaries Index has not recorded the same highs as indices in the US.
Vanguard’s Index 500 Fund, which mimics the Standard & Poor’s 500 Index, spear-headed Vanguard’s market share gains, attracting a net US$4.53 billion during the first quarter, according to Financial Research.
However, there are signs that the S&P 500’s meteoric rise may be dampening a little, at least in relative terms. To get an idea of how much the phenomenon of the index dominates the minds of American investors, consider the excitement created by the fact that four of America’s 10 biggest stock mutual funds managed to outperform the index in the first quarter of this year. It is the biggest victory for these funds since 1995.
America’s 10 biggest funds manage a combined $485 billion of assets, which equals 16 percent of the $3.11 trillion that was invested in all stock funds at the end of March.
The top performer of the top ten is the $29.1 billion Janus Fund, the ninth-biggest US fund, which gained almost 12.7 per cent during the first four months of 1999, buoyed by investments in technology stocks.
And you guessed it, a Janus fund was also the most popular fund in the first quarter, the only fund to bring in more than the Vanguard 500 fund. The Janus Twenty fund took in a net US$4.67 billion of the US$9.59 billion the group at-tracted in the first quarter.
Others beating the S&P 500 include the world’s biggest fund, the US$90.8 billion Fidelity Magellan Fund which gained 10 per cent over the quarter.
Fidelity Magellan, the world’s biggest mutual fund, had almost 21 per cent of assets invested in tech stocks at the end of March, including investments in Mi-crosoft, the world’s biggest software maker; America Online, and Cisco Systems, the leading manufacturer of Internet equipment.
Vanguard’s triumph for inflows in the first quarter flies in the face of the US mutual funds market which is suffering from the jitters largely due to of last year’s international instability and the war in Europe.
The overall flows to stock and bond funds for the quarter totalled $42.1 bil-lion, down 51 per cent from the first quarter of 1998 and the lowest first-quarter inflow since 1995, according to Financial Research analyst Chris Brown.
“International funds are being avoided because of last year’s volatility and also because of the war in Europe, which is weighing on the minds of inves-tors,” Brown says.
At least three international stock funds, including Merrill Lynch Global Alloca-tion, Templeton Foreign and Sogen International, were hit by net outflows ex-ceeding $500 million in the first quarter, according to Financial Research.
Six US stock funds suffered net outflows of $1 billion or more in the first quarter. They were Vanguard Windsor, Oakmark, Fidelity Low-Priced Stock, Frank-lin Mutual Shares, Fidelity Equity-Income and Fidelity Value, Financial Research reported.
Top 10 US funds (net inflows $US billion) first quarter 1999
1. Vanguard Group 18.0
2. Janus Capital 9.6
3. Fidelity Investments 4.1
4. Pimco Advisors 4.0
5. Alliance Capital 3.6
6. MFS Investment Management 3.5
7. Putnam Investments 1.7
8. Capital Group 1.7
9. Charles Schwab 1.6
10. American Century Investments 1.5
Ends
