John J. Brennan may not be as well-known a name in Irish investment circles as the legendary Fidelity fund manager Peter Lynch. But as chairman and chief executive officer of the Vanguard Group, he heads the second largest mutual fund provider in the world and one which is fast catching up on Fidelity in terms of size.
Headquartered in Valley Forge, Pennsylvania, Vanguard had just $1.5 billion (€1.45 billion) under management when it was established in 1975. But in the last 25 years, it has grown rapidly to the point where it now manages assets of nearly $500 billion and offers more than 100 funds to 13 million investors worldwide.
Described by one US commentator as being more like a religion than a business, Vanguard is no ordinary mutual fund complex.
For starters, it is the only mutual organisation in the mutual funds business in the US. As a result, those who buy into the company's funds also buy into the company as each fund has a stake in Vanguard.
But more importantly, because Vanguard is not a public company with outside shareholders to keep happy, it can keep costs to a minimum. Mr Brennan points out that fund sponsors generally charge high fees to manage the funds in an effort to make more money, creating a conflict between their interests and those of the ordinary fund investor.
"We take that conflict out of the business. Our expenses are a quarter of the industry average because the funds pay us directly and the management company then returns profits to the shareholders." Who are, of course, the funds and their investors.
The company's average expense ratio is just 0.28 per cent - or $2.80 for every $1,000 invested - compared with a US industry average of 1.25 per cent or $12.50 per $1,000.
The drive to keep costs down manifests itself in other unusual ways. In an industry which spends millions of dollars on promotion and where performance statistics are constantly bandied about, Vanguard does not advertise, relying instead on word of mouth to generate new business.
"We never advertise performance," says Mr Brennan. "When a shareholder is there because of performance they will leave because of performance."
The company also prides itself on its service which it believes contributes to its high customer retention rate. Management, including Mr Brennan, has been known to man the phones on particularly busy days while the company's 2,000 telephone representatives are expected to answer calls before the fourth ring. "If it gets to the fourth ring, we are not having a good day," Mr Brennan says.
Not surprisingly, Vanguard's philosophy is not to be bigger, but to be better. "The difficulty in the investment management business is that if you concentrate on being bigger, you end up promoting performance or creating products that are fads," he says.
Vanguard, as its name suggests, has also been to the fore in promoting the concept of index investing. Many of its funds, including its flagship Vanguard 500 Index Fund which tracks the 500 stocks in the Standard & Poor's index and beat 86 per cent of all US stock funds last year, are passive index equity or bonds funds. Rather than trying to outperform a given index - a feat managed regularly by few fund managers - these funds seek to match the index's performance.
And Vanguard is now eyeing Europe. The company established a presence here in April last year when it registered four funds in Dublin and set up a small marketing operation in Brussels.
Lower costs and the low tax rate were the main reasons that it opted to register in Dublin rather than Luxembourg although it was also attracted by the infrastructure on offer in the International Financial Services Centre (IFSC) where Chase Manhattan administers the funds.
Initially, it is targeting institutional investors in Britain, Belgium and the Netherlands - which account for a large chunk of the European pensions fund market - although it recently agreed a deal with Banque du Louvre to introduce three new equity index funds to France.
Mr Brennan says Vanguard is in no rush in Europe - when drawing up business plans it thinks in terms of decades, not quarters - but it believes that it can use its economies of scale, its service ethic and its performance eventually to develop a very successful business.
Already it is in the process of launching a number of new funds in the European market, including four bond funds as well as the three equity funds that are part of the Banque du Louvre agreement.
But although Mr Brennan was recently in Dublin - the first visit to the capital for a man whose grandparents hail from Kerry and Sligo - for talks on registering the funds here, the bad news for Irish investors is that they cannot invest in the products at present.
Because of the special tax regime in the IFSC, only companies located there can buy into the funds. Down the line, perhaps, the funds will become available to the ordinary Irish punter.
But until they do, Irish customers can only wait and hope that some player in the Irish market will attempt to imitate Vanguard's success in offering top quality products at the lowest possible price.
