Fund chief Brennan keeps giant's focus on the long term

Vanguard Group Inc. chief executive and Boston native John J. Brennan has headed the Pennsylvania investment giant since 1999. Vanguard, with $980 billion under management, is one of the world's largest mutual fund companies, rivaling Fidelity Investments. Brennan spoke recently with Globe reporter Ross Kerber.

A: The US economy is doing well in terms of growth and unemployment, but the market has turned in a middling performance. Why is that?

A: Well, the market has had a nice run since the stock market turned around at the end of '02, beginning of '03. The economy's been very strong, and valuations, which are always the most important thing to look at, are fine. The market's not cheap, but it's not extraordinarily expensive, so when we were starting the recovery three years ago now, we talked about the opportunity for the market to catch up to the economy.

Q: So where do you think the market will be at the end of the year?

A: You could ask, but I wouldn't tell you because I really don't have an opinion. As you get to know us a little bit, we are truly the long-term investors. We get asked all the time by clients who want to know where it's going, and our point is where it goes in the next six months doesn't matter -- it's whether stocks and bonds will systematically give you results in the long term.

Q: Mutual fund companies will face challenges when baby boomers hit retirement because they'll be spending down their 401(k) savings. How will you keep them as customers?

A: Firms like ours won't like that development. So you have to have an adaptive lineup of services and investment products that clients need and then, importantly for us, advisory capabilities that go with that. Retirement will be different for me at 52 looking forward as it was for somebody 52 years ago. The opportunity is, these millions of people who know you through their employer already might stay with you.

Q: Isn't the mutual fund industry facing more competition from hedge funds and other vehicles?

A: It's always about competition. The fundamental question: Has somebody invented a better model? And my own answer is no. It's not that hedge funds can't have a role in a very sophisticated portfolio, but for most people the costs are too high, and you're giving up investor protections.

And there are lots of products out there that could offer some of the benefits without many of the core principles that make a mutual fund a mutual fund. So there will always be more competition, and the question for the industry is ''Can we continue to deliver better and better value and in what context with performance and certain enhancements and so on," and I'm a total bull on the future of the industry.

Q: Why hasn't Vanguard focused on some new areas, like some of your other competitors who now offer employer services, such as handling payroll?

A: At our core, we want to run money. That's what we do, we're a money management firm and so we choose not to get into benefits administration and 401(k) plans. We choose not to get into other things that larger financial firms choose to do like banking services. That's just not what we do.

Q: There's a lot of criticism of 529 college savings plans as a whole, such as high fees. Is the industry doing enough to answer those concerns?

A: The market is a consumerist market, so people can do the math and they can say, ''Why would I be in this plan in my state when I can be using the Iowa plan or the Vanguard Utah plan because it's less expensive?" So what's happened is the consumer has gravitated to the better value. And that's what they should do.

People will get the consumer education or the tools to prepare.

And all that said, at the end of the day it's unbelievable how all of the savings in these plans can compound over time. I'm a big fan.

Q: Tell me about Health Savings Accounts, which more employers are starting to offer and which are getting some federal support. Will these be a growth area for you?

A: We'll have to see how they play out. They will be an important area for us down the road, and consumerism will come to healthcare. But they just haven't had much of an effect yet.

Q: The mutual fund scandals and settlements of recent years have led to a lot of regulatory changes. Which are your favorite?

A: My favorite would be the fact that every firm has to have a chief compliance officer.

Q: You've argued against the need for an independent chair on each of your funds. The matter is still in litigation, but are you prepared to have an independent chair if the rule goes into effect?

A: Sure, we're prepared. We've got a wholly independent board, so that won't affect us too much. We think dominantly independent boards are a good thing.

Q: I've heard you're a serious cyclist. Do you have any big rides coming up?

A: The Pan-Mass Challenge. It's my one big ride of the year. This will be my third or fourth time.

Q: How many miles do you do in a week to get ready?

A: Not enough. I only bike on the weekends.

Ross Kerber can be reached at kerber@globe.com.