Vanguard [see profile] has fired Mellon from two mutual funds. Today the Valley Forge, Pennsylvania-based fund firm revealed that its own quantitative equity and fixed income groups have taken over the $8.6 billion, one-star Asset Allocation Fund that Mellon subadvised, and that D. E. Shaw Investment Management, Los Angeles Capital Management and its own quantitative equity group have taken over the $4 billion, three-star Growth and Income Fund from Mellon (while keeping it a quant fund. Meanwhile, Vanguard also revealed plans to transform its $25 billion LifeStrategy target risk funds into all-index offerings.
A spokesman for BNY Mellon declined to comment on Vanguard's moves, citing company policy.
Vanguard plans to merge Asset Allocation into the $11.1 billion, four-star Balanced Index Fund, pending shareholder approval. Balanced Index is all-index, managed by Vanguard itself and slightly cheaper than Asset Allocation (26 basis points and 12 bps for Balanced Index's Investor and Admiral shares, respectively, compared to 27 bps and 19 bps for Asset Allocation).
Dan Wiener, editor of the Independent Adviser for Vanguard Investors, isn't surprised that Vanguard booted Mellon from Asset Allocation. He blames "a bit of poorly timed market timing" by Mellon last month.
"It appears the managers sold down stocks in mid-August only to repurchase them near month's end," Wiener wrote in the Independent Adviser's September issue. "Asset Allocation's 5.8 percent loss during the month was the worst of the active balanced funds."
Yet Vanguard CEO Bill McNabb praised Mellon's work.
"Mellon has distinguished itself for many years as an investment advisor for Vanguard, and we want to express our sincere gratitude for their dedication, commitment, and service to our clients," McNabb stated.
Vanguard spokesman Josh Grandy did not specifically blame last month's performance for the decision.
"The fund’s board considers numerous factors in its evaluation investment advisors, including portfolio, philosophy, process, performance, and the strength and composition of the investment team," Grandy told MFWire.com in an e-mailed statement. "We believe the strategic, static allocation approach followed by the Vanguard Balanced Index Fund will provide shareholders with competitive returns with less risk."
As for Growth and Income, "in this case, the Board concluded that a multi-manager approach that combined the skills and experience of three managers –- Vanguard, LA Capital, and DE Shaw –- would best serve the shareholders of the Growth and Income Fund going forward," Grandy stated. "
The new advisors are high-caliber managers with differentiate strategies, which are expected to reduce portfolio volatility relative to the benchmark and preserve the fund’s ability to outperform."
Company Press Release
VALLEY FORGE, PA, SEPTEMBER 30, 2011—The four funds in the Vanguard LifeStrategy® series, which currently feature a mix of passively and actively managed funds, will adopt an all-index approach.
The funds will invest solely in their three broad market component funds (Vanguard Total Stock Market Index Fund, Vanguard Total International Stock Index Fund, and Vanguard Total Bond Market II Index Fund) and gradually eliminate exposure to their actively managed component funds (Vanguard Asset Allocation Fund and Vanguard Short-Term Investment-Grade Fund).
“An all-index approach has several benefits, including lower costs and a simplified portfolio design,” said Vanguard CEO Bill McNabb. “This change will also bring a more consistent approach to Vanguard’s entire global line-up of lifecycle funds.”
Once the transition to the lower-cost index funds is completed, the expense ratios of the LifeStrategy Funds are expected to decline two to four basis points and will range from an estimated 0.14% to 0.18%. (During the transition, which is expected to last several months, the expense ratios will remain between 0.18% and 0.20%.) The all-index composition is used by Vanguard’s LifeStrategy Funds offered in the United Kingdom and Australia, and the component funds in the LifeStrategy Funds are the same three total market index funds that comprise Vanguard’s Target Retirement Funds.
The LifeStrategy Funds will offer well-defined, static portfolios with these consistent risk profiles:
Growth Fund: 80% stocks/20% bonds
Moderate Growth Fund: 60% stocks/40% bonds
Conservative Growth Fund: 40% stocks/60% bonds
Income Fund: 20% stocks/80% bonds
Introduced in 1994, the LifeStrategy Funds have aggregate assets of $25 billion.
Proposed fund merger announced
Vanguard has modified the investment strategy and policies of the $8.6 billion Vanguard Asset Allocation Fund and named new investment advisors. Vanguard’s Quantitative Equity and Fixed Income Groups have assumed investment advisory responsibilities from Mellon Capital Management Corporation and will gradually transition the fund to a static 60% stocks/40% bonds portfolio.
Introduced in 1988, the Asset Allocation Fund had followed a tactical approach, allocating its assets among U.S. stocks, bonds, and money market instruments based on the advisor’s evaluation of expected risk and returns. These proportions changed as the advisor’s risk/return expectations shifted, and the fund had the flexibility to invest up to 100% of its assets in any one of the three asset classes.
Vanguard has also filed a preliminary proxy statement with the U.S. Securities and Exchange Commission that seeks shareholder approval to merge the Asset Allocation Fund into the $11.1 billion Vanguard Balanced Index Fund. Introduced in 1992, the Balanced Index Fund adheres to a strategic investment policy (60% stocks/40% bonds) and seeks to track two indexes that represent the broad U.S. equity and U.S. taxable bond markets. Vanguard has managed the fund since its inception.
“We expect that the strategic approach followed by the Balanced Index Fund will provide competitive returns over the long-term with less risk,” said Mr. McNabb.
Shareholders will also realize modest expense savings if the merger is approved. The Investor Shares and Admiral Shares of the Balanced Index Fund feature expense ratios of 0.26% and 0.12%, respectively, compared with the 0.27% and 0.19% expense ratios for the corresponding share classes of the Asset Allocation Fund.
New advisors for Growth and Income Fund
Vanguard also announced that the $4 billion Vanguard Growth and Income Fund has adopted a multi-manager approach, with three advisors assuming investment advisory responsibilities from Mellon Capital Management Corporation. The new advisors, each of which manage approximately one-third of the fund’s assets, are: Los Angeles Capital Management, D.E. Shaw Investment Management L.L.C., and Vanguard Quantitative Equity Group.
The objective and investment strategy of Vanguard Growth and Income Fund will not change. The advisors will continue to adhere to a quantitative approach, using computer models to select a broadly diversified group of stocks that, as a whole, have investment characteristics similar to those of the S&P 500 Index, but seek to provide a higher total return than that of the benchmark.
“Mellon has distinguished itself for many years as an investment advisor for Vanguard, and we want to express our sincere gratitude for their dedication, commitment, and service to our clients,” said Mr. McNabb.
About Vanguard
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies and a leading provider of company-sponsored retirement plan services. Vanguard manages more than $1.6 trillion in U.S. mutual fund assets and offers more than 170 funds to U.S. investors and more than 60 additional funds in non-U.S. markets.
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Mutual funds, like all investments, are subject to risks. Each LifeStrategy Fund invests in broadly diversified Vanguard funds and is subject to the risks associated with those underlying funds.
Diversification does not ensure a profit or protect against a loss in a declining market. Investments in bond funds are subject to interest rate, credit, and inflation risk. Foreign investing involves additional risks including currency fluctuations and political uncertainty. Stocks of companies in emerging markets are generally more risky than stocks of companies in developed countries.
Investments in Target Retirement Funds are subject to the risks of their underlying funds. The year in the fund name refers to the approximate year (the target date) when an investor in the fund would retire and leave the work force. The funds will gradually shift emphasis from more aggressive investments to more conservative ones based on its target date. An investment in a Target Retirement Fund is not guaranteed at any time, including on or after the target date.
An investment in a money market fund is not insured or guaranteed by the Federal Deposit Insurance Corporation or any other government agency. Although a money market fund seeks to preserve the value of your investment at $1 per share, it is possible to lose money by investing in such a fund.
For more information, visit vanguard.com, or call 800-662-7447 to obtain a fund prospectus. Investment objectives, risks, charges, expenses, and other important information about a fund are contained in the prospectus; read and consider it carefully before investing.
All asset figures are as of August 31, 2011, unless otherwise noted.
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