Propelled by sales of its ex-change traded funds, The Vanguard Group Inc. regained its status as the nation's top-selling fund company last year, edging past rival American Funds, which had been No. 1 since 2002.
Investors poured a net $76.2 billion into Malvern, Pa.-based Vanguard's stock, bond and ex-change traded funds last year, compared with $74.7 billion for American Funds, according to Boston's Financial Research Corp.
American Funds is run by Capital Research and Management Co. of Los Angeles.
Vanguard, which held the top sales slot from 1998 to 2001, was surpassed by American Funds in 2002. Barclay's Global Investors of San Francisco ranked No. 3 in net sales last year at $58.1 billion.
Vanguard was clearly helped by sales of ETFs, which it says are mainly sold through financial advisers.
The company's ETFs took in a net $16.8 billion last year, up significantly from $8.1 billion a year earlier.
Taking ETFs out of the equation, net sales of stock and bond funds at Vanguard totaled just $59.4 billion in 2007, significantly less than American Funds' $74.7 billion. American does not offer ETFs.
Money going into the firm's target date funds represented 33% of Vanguard's net flows, said Michael Miller, managing director for planning and development at the company.
"We believe back to basics made a difference with shareholders — low cost and high value," he said.
STILL THE BIGGEST
American Funds, with $1.15 trillion in total assets, still held on to its status as the world's biggest fund company. Vanguard, by comparison, ended the year with $1.08 trillion in assets, according to FRC.
"Our goal has never been to be the largest seller of mutual funds," said American Funds spokesman Chuck Freadhoff. "Our goal has always been to provide the best possible long-term investment results for our shareholders."
Despite Vanguard's success, American Funds has no plans to launch its own line of ETFs, Mr. Freadhoff said.
"We do not now offer ETFs and have no plans to offer them," he said.
American Funds does, however, see potential growth opportunities in target date funds. The firm began offering such funds a year ago.
"We absolutely anticipate growth in target date funds," Mr. Freadhoff said. "We think they will, over time, become an important part of people's retirement plans."
Vanguard, which is primarily known for its lineup of index funds, surpassed American during a year when actively managed funds generally outperformed index funds.
The average 2007 return for actively managed diversified U.S. equity funds — not including specialty funds — was 6.60%.
For Standard & Poor's 500 stock index funds, the average 2007 return was 5.02%, according to Morning-star Inc., a Chicago-based fund tracker.
That said, the volatility of the stock market last year may have led many investors to seek solace in index funds.
"What this clearly shows is that the right message is finally getting through to investors," said Eric Toya, a wealth manager at Leonard Wealth Management of Redondo Beach, Calif., which has $200 million in assets under management.
"Load funds are a waste and active management is a loser's game. Low cost, low turnover, passively managed investments like index funds are the way to go."
It also helped that Vanguard launched more than a dozen new funds in 2007. Its two best-selling funds last year were the Vanguard Total Stock Market Index, which took in a net $17 billion, and the Total Bond Market Index fund, which pulled in $12.5 billion.
'LOW COST LEADER'
Cost is another driver. While both firms are recognized for their low expense ratios, ETFs may give Vanguard an edge.
"Vanguard is the low-cost leader in the mutual fund realm and their ETFs are often the lowest-cost option," said Dan Culloton, a fund analyst with Morningstar.
"People focus on cost more when returns are low in the market," said Dan Wiener, the New York-based editor of The Independent Adviser for Vanguard Investors.
While the company says Vanguard has no intention of touting its status as the nation's top-selling fund company in its advertising to investors, the title does carry a certain amount of cachet.
Being No. 1 connotes good performance, said Scott Toms, an in-vestment officer at Cornerstone Advisors Inc. of Hagerstown, Md., which manages $130 million in assets.
"If you are trying to build a book of clientele and let the money managers manage that side, then an adviser like that cares," he added.
Numbers fuel name recognition, said Mark Schumacher, a business manager at FFP Wealth Management of Coon Rapids, Minn., which manages $70 million.
"The best fund, five-star, best category; clients like to hear and see that stuff," said Mr. Schumacher. "But we do our own research."
Meanwhile, some advisers aren't impressed.
"Who cares?" said Jeff Carbone, managing partner of Cornerstone Financial Partners Inc. of Cornelius, N.C., which manages $320 million in assets. "As an independent adviser our role is to find the best fund for a specific sector of investments."
Sue Asci can be reached at sasci@crain.com.
