Friday August 28, 03:00 PM

ANALYSIS - Fidelity, Vanguard debate market share

By Ross Kerber

BOSTON (Reuters) - Which is the biggest mutual fund company?

It depends on what you mean by "mutual fund," and that's the reason it's hard to pick a winner in the struggle between Fidelity Investments and Vanguard Group Inc for the coveted position of the fund firm with the most assets.

Both can claim to be top dog, citing different calculations to argue their cases, and both claims have merit, according to analysts.

There is plenty at stake. The bragging rights can arguably be used to pull in more assets, which translate into higher fees and profits. In the case of Boston-based Fidelity, being known as second-biggest could create a sense of vulnerability as it was indisputably No. 1 for many years.

The critical difference is whether the rapidly growing segment of exchange traded funds, or ETFs, should be included in any tally of mutual fund assets. If they are excluded, Fidelity is tops; when included, Vanguard is the clear winner.

Lately the question has provoked some heat.

"Excluding ETFs from the count would be like not counting the Prius in Toyota sales figures because it is a hybrid," said John Woerth, a spokesman for Vanguard, in Malvern, Pennsylvania.

Woerth was responding to comments last week by Fidelity President Rodger Lawson, who said the Fidelity had widened its lead over competitors. At the end of June, excluding ETFs, Fidelity claimed 12.4 percent of the mutual fund industry's $9.1 trillion in assets, up from 11.7 percent at the end of 2008, according to a presentation Lawson gave to Reuters in a rare interview.

"I'm really proud of what we've done," Lawson said.

Fidelity's calculations were based partly on figures from New York consulting firm Strategic Insight. But at that firm, senior analyst Loren Fox said he would be inclined to include ETFs in market share figures since they are regulated like mutual funds and compete for the same attention from financial advisers.

"There is a tremendous overlap in use between ETFs and mutual funds," he said.

According to Fox, including ETFs, Vanguard had $1.19 trillion worth of mutual fund assets at the end of July, or 11.9 percent of the market. By the same measure, Fidelity had $1.17 trillion in fund assets, or 11.5 percent of the market.

Capital Group Cos, parent of American Funds, was in third place with $857 billion in assets.

Jeff Tjornehoj, research manager for Lipper, a Thomson Reuters company, said the competing claims of Fidelity and Vanguard are no surprise since Fidelity is best-known for its actively managed funds while Vanguard is best-known as an index fund shop.

The debate illustrates the rising importance of ETFs for the whole funds industry. "I think it reveals some concerns about the future, and whether ETFs will replace actively managed portfolios for investors," Tjornehoj said.

An ETF is a security that tracks an index, commodity or basket of stocks, but trades on an exchange like an individual stock. Sellers tout the diversity of ETFs, their tax advantages and usually low expense ratios.

Since their creation in 1993, the number of ETFs and their assets have soared. There were 728 ETFs holding $531 billion at the end of 2008, up from 119 holding $151 billion in 2003, according to the Investment Company Institute, the mutual fund industry's trade group.

PILING ON THE ASSETS

Barclays' iShares ETF unit played a major part in BlackRock Inc's decision in June to buy Barclays Plc's Barclays Global Investors unit for $13.5 billion in cash and stock.

When the deal closes, BlackRock will have $2.7 trillion in client assets, based on figures from March, largely institutional assets but including $300 billion worth of iShares ETF assets and $189 billion worth of traditional mutual funds. BlackRock would eclipse all rivals as the undisputed largest asset manager.

Fidelity had $2.9 trillion in assets under administration at the end of July, up from $2.6 trillion at the start of the year, reflecting growth across all its business lines.

Fidelity offers only one ETF of its own, the Fidelity Nasdaq Composite Index Tracking Stock ETF. Lawson said Fidelity will not likely get deeper into the space unless a great deal comes along, citing ETFs' low profit margin.

Lawson said Fidelity sells ETFs from Barclays, State Street Corp and others, so there is less need for Fidelity to rush out its own products.

Lawson's broader strategy is diversifying into many different areas, including the brokerage business and retirement services. "You don't want to become like the Panda bear, dependent on one product," he said.

Vanguard Managing Director Michael Miller said it is hard to exclude ETFs from the company's market share calculations because many of its ETFs are just different asset classes of Vanguard funds. "I think you would have to be a little closed-minded not to look at or consider ETF sales figures," he said. "They're obviously a growing part of the business."

If the question ever came before the U.S. Securities and Exchange Commission, the agency might side with Fidelity. The agency notes on its website that unlike a conventional mutual fund, ETFs generally redeem shares from their underlying index rather than cash when investors sell. So, the SEC states, "ETFs are not considered to be and may not call themselves mutual funds."

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