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Portfolio > Mutual Funds

Vanguard Proposes Fund-Advisor Changes

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Vanguard made headlines Thursday by announcing that CEO Bill McNabb is stepping down and passing the baton to Chief Investment Officer Tim Buckley on Jan. 1. McNabb will remain chairman.

While analysts say that this transition won’t result in much change, there are other issues going on at the world’s largest fund group — which has about $4.4 trillion in client assets.

On the same day it shared the news of McNabb’s retirement, Vanguard also filed a preliminary proxy statement with the Securities and Exchange Commission seeking shareholder election of a board of trustees for all of its funds and approval of several fund-policy changes.

“We encourage Vanguard fund shareholders to vote on these important proposals, which will put in place the people and policies to enable us to continue to lower the cost of investing and enhance the management of our funds with the ultimate goal of improving client outcomes,” McNabb explained in a statement.

The fund family is expected to make “a fairly seamless transition from McNabb to Buckley,” said Kevin McDevitt, Morningstar’s lead analyst on Vanguard funds, in an interview posted on the research firm’s website Thursday.

“But also, I think, Buckley’s experience is well suited to where the firm is going. One of the big emphases for Vanguard has been technology,” McDevitt added. “Just investing heavily in technology, that’s how the firm has scaled so remarkably under McNabb’s tenure. I think that Buckley is well suited to continue that.

As to the fund changes, McDevitt agrees with the shifts — the most important of which allow fund managers to work with external investment advisors and affiliated subsidiaries as investment advisors.

“In terms of Vanguard’s work with outside managers, [the proposal] is a good thing. People can vote with their feet when it comes to the advisor lineup. And as a practical matter, this only makes sense,” he explained in an interview with ThinkAdvisor.

Proposal Details

Vanguard’s first proposal would give fund managers the ability to retain external firms as investment advisors without “expending the considerable time and expense to obtain shareholder approval via proxy solicitation” for each shift in the sub-advisory relationships.

Vanguard shareholders approved a similar proposal in 1993, the firm says, and 48 funds today have this ability to enter into or amend advisory agreements.

“The proposal, if approved, will standardize this policy across Vanguard’s entire lineup,” the firm said in a statement.

Though Vanguard doesn’t intend to employ such a policy with its managed funds, the change would let trustees “retain an advisory firm to diversify a fund’s management team or ensure management continuity in the event of a contingency.”

Another proposal seeks shareholder approval of a plan that would enable fund managers to retain Vanguard-affiliated subsidiaries as investment advisors “without the time and expense of a proxy solicitation to gain shareholder approval.”

Vanguard says it has in-house investment teams, such as the Fixed Income and Equity Index Groups, that manage “a significant portion of its U.S. funds,” while its affiliated subsidiaries manage non-U.S. domiciled funds and ETFs.

“With shareholder approval of these two advisor-related proposals, all Vanguard funds could operate under the ‘manager of managers’ structures that are widely used in the mutual fund industry,” the fund group stated.

According to the firm, the Securities and Exchange Commission has issued more than 200 orders like those proposed by Vanguard since 1995. These orders have allowed “other prominent mutual fund firms to enter into such advisory relationships to realize efficiencies while protecting shareholders’ interests,” the firm says.

Other Changes

Vanguard’s trustees also are asking for shareholder approval to change the investment objective and associated benchmark for the firm’s REIT Index Fund and Variable Insurance Fund-REIT Index Portfolio. Such moves would align the funds with the updated Global Industry Classification Standard methodology; the firm’s 10 other sector-index funds currently aim to track MSCI benchmarks under this methodology.

In terms of REITs, the proposed benchmark is the MSCI US Investable Market Real Estate 25/50 Index, which includes real estate management and development companies in addition to real estate investment trusts (REITs), offering investors broader exposure to the real estate market. The funds currently seek to track the performance of the MSCI US REIT Index, which only includes publicly traded equity REITs.

Vanguard also wants to reclassify the REIT Index Fund from “diversified” to “non-diversified” as defined by securities laws. The change, it says, will allow fund managers to better replicate its target benchmark by holding securities in their appropriate weight. (Many of its other equity sector funds are classified as non-diversified.)

Separately, the fund family filed a registration statement with the SEC for the Vanguard REIT II Index Fund, which aims to track the same benchmark as the REIT Index Fund. The new fund will be available for investment to the REIT Index Fund and other Vanguard funds, along with some Vanguard institutional clients, the fund says.

In addition, Vanguard shareholders have submitted two proposals: One calls for two Vanguard funds to separately disclose their votes on climate-change proposals; the other seeks to prescribe specific investment limitations on several funds.

— Check out The Future of the Investment Management Industry on ThinkAdvisor.


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