April 3, 2003 — Vanguard Group said it will change the benchmarks that six of its stock index funds track, adopting bogeys developed by Morgan Stanley Capital International Inc.

The move affects about $19.5 billion of the $200 billion Vanguard manages in 40 stock and bond index funds. However, Vanguard does not plan to change the benchmark for its flagship Vanguard 500 Index/Inv (VFINX), which mimics the Standard & Poor’s 500-stock index, a company spokesman said.

The funds involved include the $7.4 billion Vanguard Growth Index/Inv (VIGRX), the $4 billion Vanguard Small Cap Index/Inv (NAESX), the $3.3 billion Vanguard Mid Cap Index/Inv (VIMSX) and the $3 billion Vanguard Value Index/Inv (VIVAX).

The other funds affected are Vanguard Small Cap Value Index/Inv (VISVX), the Vanguard Small Cap Growth Index/Inv (VISGX). The change also affects the Mid-Cap Index portfolio of Vanguard’s Variable Insurance Fund, which has $253 million in assets.

The funds currently all track benchmarks developed by Standard & Poor’s, except the Small Cap Index fund, which mimics the Russell 2000 index.

The MSCI indexes “incorporate most of the best practices we seek in market benchmarks,” Gus Sauter, a managing director who heads Vanguard’s quantitative equity group, said in a statement. Sauter added that the firm expects the new benchmarks “to reflect the performance of the funds’ targeted market segments more accurately than any other available indexes.”

The MSCI indexes incorporate “the best practices” Vanguard said it seeks in market benchmarks. These, it said, include objective, not subjective rules for index development, and market capitalization definitions that “slightly overlap.”

Vanguard said the new benchmarks also feature market weightings that reflect only “floating” shares that are available and freely traded in the open market. In addition, they define stocks as value or growth-oriented based on a variety of factors.

Vanguard will switch the funds over to the new benchmarks between April 20 and Sept. 30. The change is not expected to generate “significant” capital gains for shareholders, according to Vanguard, which said that portfolio turnover should be lower under the new indexes than it is under the benchmarks the funds currently track.

The changes will increase the number of Vanguard index funds tracking MSCI benchmarks to 13 from six.

Vanguard shareholders approved a proposal in December that makes it easier for eight of its stock index funds to change the benchmarks they track. The proposal enables the funds’ trustees to change their target indexes without having to get shareholder backing.

Vanguard has said the policy allows trustees to find new indexes that may be superior to those the funds are now designed to mimic.