Whilst the Dow Jones Industrial Average’s surpassing of the 10,000 mark may be treated as more of a symbolic event rather than a truly meaningful one, it does stand as a benchmark in the institutional fund world for the tremendous growth in fund assets in recent years. Just as pension fund assets have seen their equity allocations rise, and their overall portfolio size double or even treble in some cases, so too have assets in the largest US mutual funds, whose assets under management largely comprise of 401K plan money.
For the media, one of the more tangible effects of this has been the "battle" between Fidelity Magellan and Vanguard 500 Index Fund for the position as largest mutual fund in the US (and the world) by the year 2000. Vanguard has one distinct advantage, it is still open to new investors, whilst Fidelity Magellan is no longer. The closure of Magellan (after a relatively brief re-opening) also reflects another trend in the US fund arena - that of closing funds to protect the portfolios and allow the managers to focus on managing the money they already have, rather than having to find ways to allocate more money.
The gap between Vanguard 500 and Magellan has narrowed quite dramatically in recent times, with the index tracking fund now a mere $8 billion poorer than Fidelity’s behemoth. Many commentators are anticipating that the Vanguard fund’s assets will overtake Magellan before year-end. This is forecasted for two reasons: firstly, the fund tracks the market whilst Magellan is actively managed and currently heavily focused on Large Cap Growth stocks, overweight in the booming but highly volatile technology sector; and secondly because of the availability of the fund for new investors.
In reality, the management of Magellan will probably the key factor. At the moment, despite some recent fluctuations, the large cap growth market segment is riding high, driven by the continued boom in technology and internet-related stocks. If Magellan retains such weightings and the technology sector continues its bumpy ride up, then it is difficult to see how the market tracking Vanguard can make up that extra 10% of assets without a huge inflow. One factor that may assist Vanguard is the recent resurgence in value stocks, a sector that has been quite depressed in recent times, despite the ongoing US bull. Just as Fidelity beat the index during 1998, so its large cap growth focus has given it the performance edge this year to date: Magellan rising by 9.66% and Vanguard 500 by 7.68% respectively.
Whilst the S&P 500 has recorded a 7.64% gain this year to date, the largest value stocks have recently rebounded to show an overall increment of 10.35% this year to date. Midcap value stocks have also recently experienced an upswing bringing them back into positive territory for the year, while the depressed small cap market buoyed by burgeoning internet stocks is still dominated by growth stocks - although again the trend for value is currently upwards.
One factor that may influence inflows, however, is the shift in institutional focus from equities into bonds. Although this has yet to be truly reflected in investment behaviour, it is being reported that some of the largest US pension funds have started to seek out new managers for both domestic and international bond allocations. Should such a shift be matched in the direction of 401k assets, and ultimately it will be, even if on a diluted basis, then Vanguard may find new investment slowing.
David Masters is with Standard & Poor’s Fund Services in New York.