Look behind the scenes of the world’s biggest mutual fund

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.

 The best index fund managers find small ways to wring out additional gains while tracking a benchmark. For the past five years, the Vanguard Total Stock Market fund has lagged its index by an annual average of only 1 basis point, or 0.01 percent, even as it charges an expense ratio of 0.04 percent in its institutional share class.
For a guy who oversees the better part of a trillion dollars, O’Reilly doesn’t put on many airs. He doesn’t have his own office. Instead, he works at a standing desk on Vanguard’s equity trading floor, which was renovated earlier this year in a somewhat utilitarian style. Vanguard doesn’t spend a lot of money on art or frills. “We don’t need fancy couches or stuff like that,” Brennan says. “We’re here to work.”
Hope other financial sector professionals also emulated similar practices.
In India. active funds continue to rule the roost despite large strides in equity market development and efficiency. Ideally, one should have seen decline of active funds and rise of index/passive funds. But this is yet to happen.

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