The Vanguard Group

The Vanguard Group

Four C Analysis

Company:

The Vanguard Group, headquartered in Valley Forge, PA, is the nation's second-largest mutual fund and a leading provider of company-sponsored retirement plan services. Vanguard serves come 18 million shareholders accounts and manages approximately $850 billion in US mutual fund asssets, including more than $260 billion in employer-sponsored retirement plans. Vanguard offers 130 funds to US investors and 40 additional funds in foreign markets.

Vanguard's corporate structure creates two major benefits for its shareholders:

* Tremendous cost savings

* Services with an unwavering client focus

Admiral Shares were introduced by Vanguard in November 2000 to recognize and encourage the cost savings associated with large and long-tenured accounts by passing along these savings to these shareholders in the form of lower fund expense ratios. Vanguard is simplifying the eligibility criteria for Admiral Shares and lowering the account balance requirements, effective May 10, 2005.

Under the new criteria, a Vanguard shareholder owning a regular or IRA account will qualify for Admiral Shares under the following circumstances:

* The fund account balance totals $100,000 or more. (Previously, a balance of $250,000 was required, or a $150,000 balance in a fund account established for at least three years.)

* The fund account balance totals $50,000 or more and the fund account has been established for at least ten years. (Registration for online account access on Vanguard.com® is also required.)

Competition:

* Fidelity

* American Funds

In August, Fidelity voluntarily capped expenses on its domestic equity index funds at 0.1 percent, undercutting fees on similar offerings from Vanguard. By making its index mutual funds the cheapest on the market, Fidelity has issued a challenge to Vanguard, and thrown up a significant hurdle for the indexing expert. And the change may well keep some assets under the Fidelity roof. The firm has added $2 billion in new index assets since its initial reduction in fees. However, Fidelity's $10,000 minimum may put off some new investors.

Condition:

With Wall Street entering an era of slower earnings growth, every penny of investment return counts, and that means management fees matter more than ever.

* Rising popularity of low-cost exchange-traded (ETF) and index mutual funds.

These baskets of stocks may broadly cover the entire market, or narrowly focus on just a portion of it, such as a sector, industry, global region or country. The main difference between ETFs and index mutual funds is that the former is traded like a stock; ETFs are priced intraday, can be used to establish long and short positions, and each transaction generates a trading cost.

Vanguard Group recently launched three new international ETFs, bringing to 23 the number of funds in its ETF family, known as VIPERs. With just $7 billion in ETF assets, Vanguard has a long way to go before it catches up with market leader Barclays Global Investors, which has some $123 billion under management across 98 domestic iShares funds; including international offerings, there are more than 120 iShares. With so much proliferation of product in the industry, there are now a number ways to invest in sector ETFs -- through SPDRs, through Vanguard's VIPERs series, which track Morgan Stanley Capital International indexes, and the iShares series from Barclays Global Investors, which follows Dow Jones indexes, among others.

Industry estimates indicate that 3.5 million people in the United States have $1 million or more to invest.

"In a much more challenging and competitive environment, it will be prohibitively expensive to be merely a marketing-driven firm." John J. Brennan, Chairman and CEO

"Costs have always mattered in our business, but they will matter more in the decades to come. Investors are rapidly becoming more sensitive to costs, given the lower market returns they've experienced." John J. Brennan, Chairman and CEO

Customers:

Seven investor segments have been classified based on the Investor Demand Study:

1. Players are generally active return seekers who consist of higher-income, more-educated professionals. They look for the best tools to help themselves optimize their wealth in the short-term, preferring individual stocks. They are highly knowledgeable and personally enjoy their finances. Also, they are highly confident in their financial situation and optimistic about the future. Most importantly, they are risky and believe in their own ability to invest for short-term gains.

2. Managers consist of the same key demographics as Players but their favorite product is mutual funds. They have the rationale of "buy and hold" and they view mutual funds as the purest expression of their investment philosophy. Their decision driver is assistance to manage and optimize their investments for long-term growth.

3. Adviser Dependents profile consist of more educated, older and retired demographics. They value advisers for their financial expertise and feel they have earned higher returns by working with advisers. They strongly value personal relationships and it is important that the adviser knows them and their personal situation. Similar to Managers, mutual funds are the preferred product and they also have the "buy and hold" investment philosophy.

4. Complacent independents are generally older investors who prefer cash and mutual funds. They are looking for a great value for the price. They are comfortable with their financial situation and see no reason for change. They typically distrust advisers and are not open to paying for advice. They hold a long-term view and are conservative in their investment approach, preferring not to get involved in their personal finances day to day.

5. Strivers comprise professional male and younger family demographics. They look for a proven company to help in enhancing their wealth with cash and stocks. They are not satisfied with their current financial situation but are striving to improve the future situation.