Vanguard Group Chief Executive Officer John Brennan says he has found another way to save money: recycling old stationery. "How much is it...

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Vanguard Group Chief Executive Officer John Brennan says he has found another way to save money: recycling old stationery.

“How much is it going to save us?” he asks. “Fifty bucks? It’s the client’s 50 bucks, so why wouldn’t I do that?”

And forget lunch in the executive dining room at Vanguard’s Malvern, Pa., campus. There isn’t one.

Though this parsimony has given Vanguard a competitive edge, Brennan must clear some major hurdles as the firm continues to grow at a breakneck pace.

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The savings bolster fund performance, which in turn attracts more money. As of Aug. 31, Vanguard’s U.S. fund assets totaled $882.7 billion, up 57 percent since 2000. Add non-U.S. funds, institutional trusts and company stock in 401(k)s, and Vanguard is set to pass the $1 trillion-under-management mark in 2006.

Vanguard’s next $1 trillion will bring new challenges. Brennan, 51, is already struggling with the bane of big, successful fund families: swells of cash that can overwhelm managers and damage returns.

And he’s battling rivals who are gunning for Vanguard’s core franchise of low-cost index funds.

“A few years ago, the answer to indexing was, ‘It’s Vanguard, stupid,’ ” says Russel Kinnel, director of fund research at Morningstar, a Chicago-based financial-research firm. “Now, they have a new crop of competitors. It’s definitely a challenge.”

Vanguard counts about 19 million individual shareholder accounts and rakes in an average of about $1 billion a week.

Superior returns are one reason. According to Morningstar, 67.4 percent of the firm’s 43 domestic-stock funds with five-year records beat the average return of competing funds in the five years ended Aug. 31.

According to Lipper, a New York research firm, the average Vanguard U.S. diversified stock fund’s expense ratio — the amount paid by investors for expenses incurred in running a fund — was $23 for every $10,000 invested.

That compares with 0.88 percent, or $88 for every $10,000 invested, for the average U.S. diversified stock fund. Median turnover — the percentage of assets bought and sold in a year — was 19 percent for Vanguard U.S. diversified stock funds tracked by Lipper, while the industry average was 67 percent.