Vanguard crushing the competition with largest fund inflows so far in 2019

Vanguard’s inflows of new investor money are off to a strong start so far this year, with investors handing over $106 billion year to date through April -- more than four times any other Wall Street firm.

Vanguard’s $106 billion intake was spread across index mutual funds, Exchange Traded Funds, actively managed funds, and other products, according to Bloomberg. Of about 700 asset managers, Charles Schwab was a distant second with inflows of about $24 billion during the same period, mostly into its money market funds.

Vanguard is dominating “though many competitors offer even cheaper passive funds, and its gap with the rest of the industry has widened in bear markets,” noted Bloomberg analyst Eric Balchunas.

Vanguard took in $1.5 trillion over the past five years, more than twice as much as No. 2 BlackRock, with $685 billion, Bloomberg found. Vanguard now manages just over $5.1 trillion in assets globally.

And that new investor money wasn’t just flowing into Vanguard’s flagship index funds.

“We forget that Vanguard’s actively managed funds can succeed on performance as well," said Jeff DeMaso, director of research at Adviser Investments and research director for the Independent Adviser for Vanguard Investors newsletter. Adviser Investments invests in many Vanguard funds for clients with over $5 billion in assets, and calls itself a “watchdog” of the investment firm.

“We like Vanguard’s active funds with index-like fees. Everyone says index funds are eating the world, but active funds at Vanguard have put up strong numbers,” he said. “We think it’s more appropriate to compare ‘high cost vs. low cost’ funds, instead of active vs. passive.”

Vanguard, the largest passive-fund manager with $3.8 trillion in assets, is likely to become the largest active manager as well within a few years. Currently Vanguard boasts $1.37 trillion in active mutual fund assets, well ahead of Fidelity and only $179 billion behind American Funds, thanks to a higher growth rate on strong inflows at a time when most such funds are seeing outflows.

Could Vanguard one day control 30 percent of the U.S. stock market?

Vanguard’s total ownership of the U.S. stock market could hit 30 percent -- if it ever reached $20 trillion in assets, according to Bloomberg’s estimate.

Vanguard founder Jack Bogle, who died Jan. 16 at age 89, was concerned about the firm’s rapid and massive growth. He called the widespread Wall Street concentration of ownership among a few firms a worrying trend, and wrote that those few asset managers could end up owning too much of the stock market.

Vanguard still holds only about 7 percent of U.S. equities and has a group dedicated to corporate governance.

So Vanguard has plenty of room to expand. Using Apple as a microcosm of the entire U.S. stock market, Vanguard funds collectively own 7.2 percent of the tech giant’s shares, but its biggest fund has only 2.1 percent -- well below the 10 percent limit.

Even if that threshold is reached, Vanguard could in theory simply launch a new version of the fund to get around the rule. If Vanguard and BlackRock sustain their growth rates, regulators might be pressed to step in and cap the amount that asset managers can own.

A four-fold expansion of Vanguard’s assets to about $20 trillion would give it control over about 30 percent of the U.S. stock market -- a level that could be reached in less than 20 years at the company’s current pace, Balchunas wrote.

Vanguard doesn’t actually own the shares; rather, the investors in its funds do.

“It’s hard to see what would trip up Vanguard’s ability to grow assets," said DeMaso. However, Vanguard recently outsourced responsibility for voting in some actively managed funds to the portfolio managers, a decision DeMaso said “makes sense,” because those who pick the stock should be allowed to vote those shares.

Vanguard’s dominance across market environments and product types is increasing in 2019, indicating government intervention may be the only thing that could halt its growth, Bloomberg said.