I find Morningstar Investor Returns data fascinating. Recently, I looked at the gap between total returns and investor returns across the Morningstar Style Box and found that it had widened significantly. While looking at those figures, I wondered how they worked out on a fund company level. By asset weighting investor returns on a fund company level, I could find out whose shareholders fared better. Or, put another way, whose shareholders are smarter?

As you may recall, investor returns are calculated by adjusting returns for flows in and out of funds in order to arrive at an estimate of the average investor's return in the fund. As I pointed out in my comparison of CGM Focus' (NASDAQ:CGMFX - News) investor returns with T. Rowe Price Equity Income's (NASDAQ:PRFDX - News), steady returns at T. Rowe Price Equity Income led to steady flows and typically solid investor returns. However, CGM Focus' investor returns were much worse than its total returns because a huge portion of its shareholder base came into the fund in 2007 and the first half of 2008 when performance was great only to get whipsawed when performance slowed. While the gap between the two return figures is interesting, investor returns are really the bottom line. I'd feel better about CGM Focus if it had a big gap but its investor returns were still strong.

For my first fund company smack down, I went straight to the fund industry's Montagues and Capulets (substitute Hatfields and McCoys or Wolverines and Buckeyes if you prefer): Vanguard and Fidelity. To be fair, many investors have accounts with both companies, and I'm one of those--so please take this in the spirit of fun that it is intended.

To gauge whose investors are smarter or better off, I looked at 10-year returns through September 2009. I limited the study to funds that were in existence for the whole 10 years. While that could introduce serious survivorship bias for shops like Columbia and BlackRock, which have eliminated a lot of funds, Vanguard and Fidelity don't kill off many funds. We looked at investments by asset class and overall.

The Winner Is ...
Vanguard. Collectively, Vanguard investors earned a 2.63% annualized 10-year return compared with an annualized 1.52% for Fidelity investors. The asset-weighted total returns for the two firms were closer than the investor returns. Vanguard's overall figure was 3.42% compared with 3.06%. Vanguard shareholders outperformed Fidelity shareholders in U.S. stock funds, taxable bonds, and balanced funds--the first two are the biggest asset classes at both shops. Fidelity shareholders did better in international and alternative assets. The firm's municipal-bond shareholders finished within a basis point, so I'm calling that a draw.

The story on domestic stocks reflects the challenges that both firms have faced this decade. Large-cap stocks haven't done much, but that's naturally where most big equity operations will have most of their money. Performance of the most important cap-weighted indexes that Vanguard tracks has been tepid. For example, Vanguard Total Stock Market Index's (NASDAQ:VTSMX - News) 10-year return through the third quarter is 0.84% annualized--that's a little better than the average large-blend fund but in absolute terms not great. However, performance has at least been steady: The fund finishes most calendar years in the second quartile.

On the flip side, Fidelity has had a few wonderfully consistent managers like Will Danoff and Joel Tillinghast, but many other funds like Independence (NASDAQ:FDFFX - News), Magellan (NASDAQ:FMAGX - News), Export & Multinational (NASDAQ:FEXPX - News), and Dividend Growth (NASDAQ:FDGFX - News) have been roller-coaster rides with big shifts in performance, some of which led to a manager change. Thus, a 1.92% total return for the funds withered to an investor return of 0.66%.

The story on munis is also interesting. There, Fidelity beat Vanguard by 43 basis points annualized on total returns but its shareholders had the same returns as Vanguard's. The reason is that Fidelity investors redeemed about twice the percentage of assets as Vanguard investors did in the fourth quarter of 2008. Both came back when munis rallied in the first quarter of 2009, but the Fidelity investors missed enough to bring their returns back down to Vanguard investors' level.

Fidelity produced superior international total returns and investor returns through steadier performance and a sizable dose of emerging markets. Fidelity Diversified International (NASDAQ:FDIVX - News) is by far the biggest of Fidelity's foreign group. In the first half of the decade, it had great returns, and, while returns have been middling in the second half, that wasn't enough to throw investors. Other funds like Fidelity International Discovery (NASDAQ:FIGRX - News) and Fidelity Emerging Markets (NASDAQ:FEMKX - News) have strong returns in the past five years, and that means those who did get in have largely been rewarded.

To see the table, click here: http://news.morningstar.com/articlenet/article.aspx?id=312153

What It Means
Vanguard has produced steadier performance and that makes for better investor results. Both its passive and active strategies have been more dependable on the equity side. Fidelity's challenge in domestic equities is not just to produce better performance but to be able to maintain that performance edge and tone down manager changes.

It's possible that the performance gap also has something to do with each firm's message to investors. Vanguard preaches long-term investing and goes so far as to warn investors away from hot-performing funds. Just this month, it closed Vanguard Capital Value (NASDAQ:VCVLX - News) because too much hot money was coming in. Fidelity also preaches long-term investing, but it sometimes nudges people to invest based on short-term results. Shortly before Fidelity Independence tanked, for example, Fidelity was advertising the fund heavily even though it had just changed managers on the fund. When you draw a big line under one-year or three-year performance, investors will naturally sell your fund when its one-year or three-year performance is weak. Unfortunately, that's often the time that the fund is about to rebound.

Where I Placed My Bets
Vanguard and Fidelity offer quite a lot, so I have accounts with both. I go to Fidelity for its index funds, muni funds, and money markets. I go to Vanguard for its actively managed stock funds and one index fund. And I'm a patient investor so that I can be there when the rally starts or at least close enough. My Vanguard holdings include the closed Capital Opportunity (NASDAQ:VHCOX - News) and Vanguard Primecap Core (NASDAQ:VPCCX - News) as well as the still-open Vanguard International Growth (NASDAQ:VWILX - News) and Vanguard FTSE Social Index (NASDAQ:VFTSX - News). I've owned Cap Opp and International Growth since the mid-1990s. At Fidelity, I own Fidelity Tax-Free Bond (NASDAQ:FTABX - News), Fidelity Spartan Total Market Index (NASDAQ:FSTVX - News), and Fidelity Spartan International Index (fsivx..)

Russel Kinnel has a position in the following securities mentioned above: VWILX VWILX VPCCX VFTSX VHCOX FTABX FSIVX FSTVX