(Adds material on Buckley's background, analyst comment, details on shareholder approval process)
By Ross Kerber
BOSTON, July 13 (Reuters) - Vanguard Group, the world's largest mutual fund manager, said on Thursday Chief Executive Bill McNabb will step down at year end and be replaced by Chief Investment Officer Tim Buckley, betting on the internal successor to oversee rapid growth.
McNabb, 60, who took the CEO job in 2008, will remain chairman of the Pennsylvania company where he oversaw massive inflows to its low-cost products, including index funds, after steering the company through the financial crisis.
Vanguard now manages about $4 trillion, up from about $1.25 trillion at the start of McNabb's reign and far eclipsing rivals like Fidelity Investments and T. Rowe Price Group that are better known for their actively managed mutual funds.
Vanguard has also suffered a string of technical glitches since last year and responded by adding staff. Software engineers make up about a quarter of its workforce of about 15,000 people.
"The goal is that we not only lead on investment returns, we lead on our level of service to clients," Buckley, 48, said in an interview.
Buckley also aims to continue Vanguard's overseas expansion. Another concern has been that index funds could lose their appeal in a market downturn, which could favor some active fund managers. While Vanguard also offers active funds, Buckley said the concern is misplaced.
"There's no good environment for high costs," he said. "Markets will humble you, and volatility will return. You've got to stay disciplined," he said.
McNabb said the timing seemed right to step back from the top job, and that there were no other internal or external candidates to succeed him after working closely with Buckley on Vanguard's executive committee more than 16 years.
Buckley will become the fourth CEO of privately held Vanguard, which began operations in 1975 under founder John C. Bogle, who remains affiliated with the company but is no longer in senior leadership.
Buckley joined Vanguard in 1991 as an assistant to Bogle. He later headed Vanguard's information technology division and its retail investor group.
Buckley was also named president and a director of Vanguard. Greg Davis, 46, head of fixed income, will take over as chief investment officer.
Vanguard named two other new directors, Sarah Bloom Raskin, a former U.S. Treasury official, and Deanna Mulligan, CEO of The Guardian Life Insurance Co of America.
Industry observers noted that these director appointments and that of Davis, an African-American, diversify Vanguard's leadership. They "make Vanguard look more like its client base," said Dan Wiener, who edits a newsletter for Vanguard investors.
Although Vanguard's structure makes operations more opaque than those at some publicly traded rivals, it will seek investor approval of these appointments. At a meeting set for Nov. 15 in Scottsdale, Arizona, according to a securities filing, Vanguard will ask investors to elect Buckley, Raskin and Mulligan and other nominees to a board that oversees its mutual funds.
It will also seek approval for other changes, including giving funds the ability to hire external managers without shareholder permission, and to change investment objectives of two index funds.
Vanguard also faces shareholder proposals including one seeking review of its tendency not to support proxy measures related to climate change. According to a securities filing, Vanguard recommends investors vote against this proposal, saying it uses behind-the-scenes talks to influence company executives on climate issues. (Reporting by Ross Kerber; Editing by Richard Chang and David Gregorio)