McNabb Tapped To Replace Brennan At Vanguard

February 22, 2008

Word of 53-year-old CEO's decision to step aside surprises analysts.

The man who filled some of the biggest shoes in the mutual-funds industry is giving up his daily responsibilities, ushering in a new era as the pioneer of retail indexing.

But analysts don't see Jack Brennan's departure as the Vanguard Group's chief executive as dramatically altering the company's investment focus.

The 53-year-old longtime Vanguard executive said Friday that within a year he would give up his role as chief executive officer at Vanguard. Brennan is the company's second CEO. He took control of Vanguard in 1996 from its founder, John Bogle, the pioneer of retail index mutual funds.

Vanguard says Brennan will be succeeded by F. William McNabb III, who currently serves as a managing director overseeing the firm's growing institutional and international operations.

"This is a surprise because Brennan's still pretty young," said Dan Culloton, Morningstar Inc.'s Vanguard analyst.

Brennan joined Vanguard in 1982. He was elected president in 1989 and later became its chairman in 1998 to go along with his CEO duties.

Brennan will remain as chairman of Vanguard's board and remain active working with senior executives on strategic issues, according to a company statement.

"I have been privileged to serve as a director of Vanguard and the Vanguard funds for 21 years, the company president for 19 years, and the chief executive officer for 12. I believe change is a critical part of keeping an organization vibrant and evolving for the better. So, change at the top, if you will, is something that I believe in as well," Brennan said.

McNabb has been with Vanguard since 1986, serving in several different senior management roles. The 50-year-old executive has been in charge at different times of each of the firm's key client-related divisions during his 22-year career. The businesses he runs now hold about $700 billion in assets under management.

"Bill McNabb is a proven leader, who together with a deep and talented senior management team, will serve as faithful stewards for our clients. Bill will succeed me as CEO within a year and I will remain on the board as chairman for the foreseeable future to help ensure a smooth transition," Brennan said.

McNabb will become Vanguard's president and director effective March 1.

"I am extremely pleased to have this chance to lead a great company and a great crew, and wish to thank Jack Brennan and the members of our Board for this remarkable opportunity. I look forward to working with Jack and my colleagues to carry on Vanguard's mission and to further the firm's position as the highest-value provider of investment products and services in the world," McNabb said in a statement.

But the timing of Brennan's stepping down and open-end statements about his future surprised some Vanguard observers. It also seemed puzzling considering his somewhat testy rise to the top. Even though Brennan had been handpicked to succeed him, Bogle wasn't entirely ready to step aside, according to reports at the time.

For some, Brennan became the ambitious interloper who forced out an industry icon. But analysts point out that the reality of the situation was probably much more mundane.

"The board under Brennan's leadership forced Bogle to retire at the mandatory age of 70," Culloton said. "It was Bogle's own rule. But he was still active and reluctant to leave."

Some of Bogle's more ardent supporters weren't so sure. "It definitely created some frosty feelings," Culloton said. "But neither one of them have talked about it in public."

In any case, he noted that Brennan undertook a big challenge replacing Bogle, at first as CEO and later as chairman. "It's always a challenge to follow someone whose statue is a cornerstone of the company's campus headquarters," Culloton said.

Brennan's diversification of Vanguard's largely index-focused business model has put the Valley Forge, Pa.-based fund firm into the top echelons among industry heavyweights. It now manages more than $1.25 trillion in U.S. mutual fund assets. That includes $43 billion in ETF assets.

Depending on the source, Vanguard's considered in the top three among domestic-based fund companies. The others commonly cited are Fidelity Investments and Capital Group, which runs the popular American Funds family.

Some researchers rank it behind Fidelity and Capital in terms of mutual fund assets. But since Fidelity and Capital aren't players in ETFs, when both types of vehicles are considered, Vanguard moves to the top in terms of total assets under management.

And Vanguard's growing practice of using top outside subadvisors to run its active funds has proved highly successful over Brennan's reign. The company has used its popularity in negotiations with asset managers to hammer particularly investor-friendly terms.

In Culloton's view, the Brennan era will go down as one of "extremely profound growth."

"It's definitely not Bogle's Vanguard anymore. But it has evolved in a responsible manner. If you consider the hallmarks of Vanguard, which are low costs, long-term investment focus and putting investors first, those characteristics are still in place," Culloton said.

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