<prompt> Human: This Basically Anonymous Fund Manager Oversees 800 Billion: Take a rare look behind the scenes at an index fund with Vanguards Gerry OReilly, manager of the worlds largest mutual fund.On understanding how an index fund performs: In theory, the best an index fund can do is the return of the benchmark minus the funds fees. In reality, a fund faces additional costs from trading and transactions that can widen the gap between the returns of a fund and those of its benchmark. Success or failure is measured in tiny increments. A basis point to us is a huge deal, OReilly says. The best index fund managers find small ways to wring out additional gains while tracking a benchmark. For the past five years, the Vanguard Total Stock Market fund has lagged its index by an annual average of only 1 basis point, or 0.01 percent, even as it charges an expense ratio of 0.04 percent in its institutional share class. ... How does the fund pick up the extra return? It makes some money by lending shares to short sellers. Last year it made about 95 million, or 2 basis points, from that. The rest comes from smart trading.On just how active a passive index fund is: But you can automate only so much, and the tough decisions still fall to the portfolio managers. When is the best time to buy an illiquid stock that trades only once or twice a day? How do you handle a corporate deal structured in an unusual way or the issuing of a new class of stock? People think a computer could run index fundsand theyre so wrong, says Brian Bruce, a former index fund manager whos now chief executive officer of Hillcrest Asset Management in Plano, Texas, and editor-in-chief of the Journal of Index Investing. The skills of an index funds human managers are underappreciated, Bruce says. While the top active fund managers are often treated like rock stars, index fund managers are basically anonymous.On understanding when to act so as not to negatively impact an individual stock, or the overall market: When stocks undergo significant changessuch as when a company is purchasedthat gets reflected in the index at the end of a trading day. Minor changes, however, are bundled up and implemented once a quarter. At Vanguard, the quarterly rebalancing is an all-hands-on-deck affair, requiring the buying and selling of hundreds, sometimes thousands, of stocks. On June 17 a team of 18 traders worked Vanguards U.S. portfolio. Pizza was served so staffers could stay at their desks as 4 p.m. approached. In index investing, the daily closing price is the crucial metric. For the most liquid stocks, such as those in the SP 500, Vanguard buys and sells as close to 4 p.m. as possible to minimize tracking errors. Near the closing bell is also when volume is highest and Vanguards trades are least likely to move the market. For smaller, less liquid stockssome of which trade only a couple of times a daythe firm has to take care to avoid influencing their prices. It often buys these stocks earlier in the day, whenever traders see the best opportunity. We dont just blindly send an order, OReilly says. We screen to make sure our order wont make too much of an impact on the price.  <response>: 70 yr old retired here who had my retirement ravaged by active funds and really bad investment advisors. I am thankfull to Vanguad and the index funds for salvaging my retirement. How was it that a twenty year period my active managed accounts made less than half my indrx fund gains. In fact one thirty thousand dollar slice invested in 1999 to this day is worth half today The agent and the fund made money, i lost big. 