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Vanguard Nips at Heels of Nation's No. 1 Firm


Once considered an immovable giant, Fidelity showed in 2002 that it is not immune to the woes of the world, as the company had its fair share of troubles in the tumultuous year for the markets, showing its own signs of fallibility.

The Boston-based juggernaut surrendered ground to Vanguard in the long-term open-end fund category over the summer, not to regain that loss in the year.

In July, Vanguard bested Fido, showing long-term fund assets of just under $466 billion. Fidelity stood at $463.5 billion for the month, according to data obtained from Financial Research Corp.

Fidelity's long term-fund assets have dropped more than 10% in the last six months, falling from $535.8 billion at the end of May, to $481.4 billion at the close of November.

Vanguard, while experiencing the negative effects of a down market as well, has not been hit as hard in this area. Vanguard shed around 5.7% in the same time period in long-term fund assets.

Neck and Neck

Currently, the difference in long-term fund assets between the firms is minimal. Vanguard is ahead of Fido by $2.2 billion. Vanguard has $483.6 billion, while Fidelity trails at $481.4 billion. Back in March, Fidelity held a 4.3% lead in the category over Vanguard.

"We do not believe this is a valid comparison because it completely ignores money markets, a major market class," said Vin Loporchio, a Fidelity spokesman. "We have over $200 billion in money market assets. These often move to equities and bonds, given what the market does." He said that any comparison between companies should include equities, bonds and money market funds.

He also said that as of the end of November, the company had assets of $527.4 billion in mutual funds and a total of $733.7 billion, including its money market funds.

And getting even more into the numbers, Loporchio said that Fidelity's official numbers differ from the data provided by FRC, although he acknowledged that the numbers may have been derived in different ways and that the numbers he provided may not make for an apples-to-apples comparison with the numbers FRC provided for Vanguard.

However, this trend is not surprising to Scott Cooley, an analyst with Chicago-based Morningstar. "I think it's something that has been going on for a while," he said. "Vanguard has been at the top or near the top of fund flow charts for six or seven years. Over the last seven years, Vanguard has had better cash flows than anyone overall."

"Vanguard's costs structure gives it a huge advantage," he continued. "Vanguard offers the best value proposition." He said that some of Vanguard's success has been because it avoided offering "gimmicky products" and it is well capitalized.

Both Leaders Highly Regarded

And, while Fidelity may have slipped in that category, Cooley still is high on both. "They're both really well managed shops. They're two of five or six shops we feel comfortable investing in rather highly." For the upcoming year, he expects Fidelity to continue to try and broaden investor perception of its offerings. "Vanguard will continue to beat the drum for diversification and low costs," he said.

However, Fidelity's troubles don't end there. Since the beginning of 2002, assets under management have slipped nearly 10%, to $797 billion, and are significantly below the peak of $1 trillion the company held during August 2000. Its Magellan Fund, its most recognizable mutual fund product, has performed poorly this year, although it is in line with the decline of the S&P 500. And in August, PIMCO's $66.3 billion flagship fund overtook the $60.9 billion Magellan as the biggest fund in the nation (see MFMN 8/26/02)

Further, earlier in the year Fidelity laid off nearly 1,700 employees, or 5% of its workforce, in a cost-cutting measure.

Even so, it has not been all bad news for Fido. The company still managed to maintain the top spot in other categories, including long-term and money market fund assets. Its long-term and money market fund assets totaled $678.7 billion as for the end of November, while Vanguard lagged behind at $582.4 billion, according to FRC.

In the previous six months, Vanguard has also gained ground in this category, closing the gap by just over $20 billion in that time period. As far as long-term fund net flows, Vanguard stayed ahead of Fidelity significantly for the majority of the year, but fell behind Fidelity in November. That month, Fidelity saw inflows of $2.3 billion, while Vanguard showed inflows of $1.8 billion.

No. 1 or No. 2, No Matter

And while a Fidelity slip may be good news for the competition, Vanguard isn't worrying about becoming No. 1. Brian Mattes, a spokesman for Vanguard, said that the company doesn't put much stock into rankings and the numbers.

When told that Vanguard overtook Fidelity back in July in long-term fund assets and asked if he expected that trend to continue Mattes said: "We don't pay much attention to it. It's not something of any interest to us. We're focused on our shareholders and not our competitors."

He said the company is not concerned with the "world of rankings" and that "people invest in the company because of its philosophy." He said that their goal is to "do right" by the shareholders. "We spend time improving our value proposition."