Closings, or partial closings, of funds are a way of life in the asset management industry. In order to keep the fund at a manageable size, the product is usually closed off to retail investors, but left open to institutional clients. The rationale obviously being that retail clients are more volatile, costly as well as higher maintenance source of flows, while institutional clients are considered to be less stressful.
Leave it to Vanguard [profile] to upend yet another bit of industry common wisdom.
The fund giant announced today that it was implementing measures to "curtail cash flow" into two of its more popular funds: the Vanguard Wellington Fund and Vanguard Intermediate-Term Tax-Exempt Fund.
Among the more notable elements of this partial closing is exactly who will lose, and who will continue to have, access to these funds.
In particular, effective immediately, the two funds will no longer accept new accounts from financial advisor or institutional clients, but will remain open to these clients for additional purchases. Retail clients may continue to establish new accounts and make additional purchases without limitation, according to the company.
“Vanguard is proactively taking steps to reduce cash flow into the Wellington and Intermediate-Term Tax-Exempt Funds to ensure that their investment advisors can continue to effectively manage the portfolios,” said Vanguard chief executive Bill McNabb in the statement. “Our commitment is to protect the interests of the funds’ current shareholders, and as we’ve done in the past, we are demonstrating the conviction to do this by partially closing two of our largest funds.”
Vanguard stated that it has a long history of acting preemptively to restrict cash inflows to maintain fund assets at reasonable levels. Currently, seven Vanguard funds are closed to most new accounts: the Admiral Treasury Money Market Fund, the Federal Money Market Fund, the High Yield Corporate Fund, the Convertible Securities Fund, the Capital Opportunity Fund, the PRIMECAP Core Fund, and the PRIMECAP Fund.
Also noteworthy are the size and cache of the funds in question.
The Wellington Fund is Vanguard’s oldest mutual fund and the largest balanced fund in the industry with $68 billion in assets according to Lipper, Inc.. Wellington Management Company has served as the fund’s advisor since its inception in 1929.
Meanwhile, the $39 billion Vanguard Intermediate-Term Tax-Exempt Fund is Vanguard’s largest municipal bond fund. The company also says that it is the largest tax-exempt fund in its category according to Lipper.
The news has attracted attention from a wide variety of news outlets, including Barron's, Bloomberg, and Reuters.
Veteran Vanguard-watcher Daniel Wiener, editor of the The Independent Adviser for Vanguard Investors, had this to say on the move:
BARRING INVESTMENT ADVISORS AND INSTITUTIONS FROM OPENING NEW ACCOUNTS in Wellington and Intermediate-Term Tax-Exempt, Vanguard is, I believe, responding to two slightly different issues with these funds.
Both funds saw heavy inflows of new money in January, with Wellington taking in over $900 million after seeing more than $300 million exit the fund in the fourth quarter. I’m assuming the trend continued in Feb., hence the closing. It’s not that the Wellington Management team can’t handle the size of the fund, but the kind of in-out cash flows they have experienced are probably making it difficult to manage in the short-term.
As for the muni fund, higher tax rates certainly must have been one reason investors plowed into Intermediate-Term Tax-Exempt, but I’m also pretty certain that manager Michael Kobs, who has money of his own in the fund, is having increasing trouble finding high-quality bonds that meet his strict requirements as investors continue to push money into anything that offers a good yield. As you can see in the chart, the fund has slight net outflow in December but flows came right back in during January, despite all the talk about some “great rotation” out of bonds and into equities.
Vanguard made a good call here and we’ll have to see if the flows abate dramatically in March, or not. Stay tuned.
Here is the press release:
Company Press Release
Vanguard to Limit Growth of Two Funds
Wellington and Intermediate-Term Tax-Exempt Funds Closed to Most New Accounts
VALLEY FORGE, Pa.-- Vanguard is implementing measures to curtail cash flow into two widely held funds: Vanguard WellingtonTM Fund and Vanguard Intermediate-Term Tax-Exempt Fund. Effective immediately, the two funds will no longer accept new accounts from financial advisor or institutional clients, but will remain open to these clients for additional purchases.* Retail clients may continue to establish new accounts and make additional purchases without limitation.
“Vanguard is proactively taking steps to reduce cash flow into the Wellington and Intermediate-Term Tax-Exempt Funds to ensure that their investment advisors can continue to effectively manage the portfolios,” said Vanguard CEO Bill McNabb. “Our commitment is to protect the interests of the funds’ current shareholders, and as we’ve done in the past, we are demonstrating the conviction to do this by partially closing two of our largest funds.”
Vanguard has a long history of acting preemptively to restrict cash inflows to maintain fund assets at reasonable levels. Currently, seven Vanguard funds are closed to most new accounts: Admiral™ Treasury Money Market Fund, Federal Money Market Fund, High Yield Corporate Fund, Convertible Securities Fund, Capital Opportunity Fund, PRIMECAP Core Fund, and PRIMECAP Fund.
Vanguard Wellington Fund
Wellington Fund is Vanguard’s oldest mutual fund and the largest balanced fund in the industry with $68 billion in assets (source: Lipper, Inc.). Wellington Management Company LLP has served as the fund’s advisor since its inception in 1929. The fund invests approximately 65% of its assets in stocks and the remaining 35% in investment-grade corporate bonds, with some holdings in U.S. Treasury, government agency, and mortgage-backed securities.
For investors seeking a fund with similar broad asset class exposure, Vanguard offers its Balanced Index Fund and Vanguard STAR Fund. Vanguard Balanced Index Fund is passively managed and seeks—with approximately 60% of its assets—to track the investment performance of a benchmark index that measures the investment return of the overall U.S. stock market. With approximately 40% of its assets, the fund seeks to track the investment performance of a broad, market-weighted bond index.
Vanguard STAR Fund is a balanced fund-of-funds that invests approximately 60% of its assets in stocks and 40% in bonds. It is comprised of eleven actively managed Vanguard funds—including domestic and international stock funds and U.S. bond funds—each of which has its own distinct investment approach.
Vanguard Intermediate-Term Tax-Exempt Fund
The $39 billion Vanguard Intermediate-Term Tax-Exempt Fund is Vanguard’s largest municipal bond fund and the largest tax-exempt fund in its category (source: Lipper, Inc.). The fund invests in high-quality municipal bonds and has an average duration of 5 years. Introduced in 1977, the fund is managed by Vanguard’s Fixed Income Group, which oversees more than $720 billion in assets.
Vanguard offers a series of 19 national and state tax-exempt funds. While no single fund offers the same risk/reward profile as the Intermediate-Term Tax-Exempt Fund, two national funds are managed using the same investment philosophy and process. Vanguard Limited-Term Tax-Exempt Fund offers a shorter average duration (2.4 years) and may be considered by investors willing to forego some income for greater interest rate risk protection. For investors who are seeking higher income and willing to accept greater share price risk, Vanguard Long-Term Tax-Exempt Fund (average duration of 6.1 years) may be an alternative.
Vanguard will continue to monitor cash flows of both the Wellington and Intermediate-Term Tax-Exempt Funds and will take additional steps to limit the size of the funds if needed. Similarly, should conditions change, Vanguard may reopen the funds.
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 nearly $2.1 trillion in U.S. mutual fund assets, including more than $260 billion in ETF assets. The firm offers more than 170 funds to U.S. investors and more than 70 additional funds in non-U.S. markets. For more information, visit vanguard.com.
*Advisor and Institutional clients may contact Vanguard for details on establishing new accounts and making additional purchases.
All asset figures are as of January 31, 2013.
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.
Mutual funds are subject to risks, including possible loss of principal. Investments in bond funds are subject to interest rate, credit, and inflation risk. Although the income from a municipal bond fund is exempt from federal tax, you may owe taxes on any capital gains realized through the fund's trading or through your own redemption of shares. For some investors, a portion of the fund's income may be subject to state and local taxes, as well as to the federal Alternative Minimum Tax.
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