A nice story of the world’s biggest Mutual Fund – Vanguard’s Total Stock Market Index Fund – and its low profile fund manager – Gerry O’Reilly. He manages the $450 billion fund!
Index funds are often called “passive investments,” yet there’s nothing particularly passive about what O’Reilly and his Vanguard colleagues do all day.
Joe Brennan, the head of the firm’s equity index group, likens managing an index fund to a game of darts—one in which both the player and the target are constantly moving. Money rolls into Vanguard’s funds almost every day, and that cash has to be put to work. The funds must match hundreds of small shifts in their underlying indexes, caused by corporate actions such as acquisitions and share issuances. “We have to deliver perfection every day,” Brennan says. “Sometimes you have to deliver perfection-plus.”
In theory, the best an index fund can do is the return of the benchmark minus the fund’s fees. In reality, a fund faces additional costs from trading and transactions that can widen the gap between the returns of a fund and those of its benchmark. Success or failure is measured in tiny increments. “A basis point to us is a huge deal,” O’Reilly says.