Home Latest Commentary chevron_right Adviser Fund Update Changes at Vanguard REIT Fund February 9, 2018 Changes at Vanguard REIT Fund Effective immediately, Vanguard has changed the investment objective, name and index benchmark of its REIT Index fund. The fund will henceforth be known as Vanguard Real Estate Index, and will track the MSCI U.S. Investable Market Real Estate 25/50 Index. The move may not be a surprise to shareholders, as there was a proxy vote to approve the new objective in November 2017. What’s a REIT? Before we get further into the changes for the fund, here’s a brief refresher on REITs (real estate investment trustsA legal document that functions as an instruction manual to how you want your money managed and spent in your later years as well as how your assets should be distributed after your death. Assets placed in a trust are generally safe from creditors and can be sold by the trustee in short order, avoiding the lengthy and costly probate process.). REITs are companies that own and manage various types of properties (think commercial or residential buildings), collecting rent from tenants or lessees and passing it on as income to shareholders (in fact, REITs are required to pass 90% of taxable income on to shareholders throughout the year). Buying shares of a REIT or a REIT fund is a means for individual investors to acquire some of the benefits (and risksThe probability that an investment will decline in value in the short term, along with the magnitude of that decline. Stocks are often considered riskier than bonds because they have a higher probability of losing money, and they tend to lose more than bonds when they do decline.) of property ownership, namely a bet on the value of the underlying properties and (hopefully) somewhat reliable income from the rent. They are typically used in a portfolio to generate income and capital appreciation (some consider them a “total return” investment, as income can be a significant piece of a REIT’s return over any given period). They are also considered a diversificationA strategy for managing investment risk by investing in a mixture of different investments. Since different asset classes face different risks, even if one type of asset declines in value, others may not. tool, as their price moves and performance can be quite different from both the stockA financial instrument giving the holder a proportion of the ownership and earnings of a company. and bondA financial instrument representing an IOU from the borrower to the lender. Bond issuers promise to pay bond holders a given amount of interest for a pre-determined amount of time until the loan is repaid in full (otherwise known as the maturity date). Bonds can have a fixed or floating interest rate. Fixed-rate bonds pay out a pre-determined amount of interest each year, while floating-rate bonds can pay higher or lower interest each year depending on prevailing market interest rates. markets. As a sector bet with an income component, they can react negatively during periods when the real estate market is in distress or if interest rates are rising or expected to rise. They have historically been far more volatile than bonds—for example, during the 2008–2009 financial crisis, Vanguard’s fund declined nearly 70% from its prior high, and it took investors nearly three-and-a-half years to recover. We caution interested investors to take a close look at the risks and tax ramifications associated with REITs before buying them. Mostly a Change in Name Vanguard Real Estate Index’s new benchmark tracks a wider range of real-estate-related securities than could be found in the MSCI U.S. REIT Index it had emulated up to this point. The new index includes management and development companies along with certain specialized REITs, but this does not represent a drastic shift for the fund or its shareholders in terms of objective nor the portfolio’s general composition. That said, Vanguard is committed to a smooth transition. Over a period of six months or so, the fund will temporary seek to mimic the MSCI U.S. Investable Market Real Estate 25/50 Transition Index and before fully embracing its new benchmark by the third quarter of 2018. The Malvern, PA fund titan said it did not anticipate the move to result in material capital gains distributions to fund shareholders. Vanguard Real Estate Index’s investor share class has a $3,000 minimum initial investment and a 0.26% expense ratio. The ETFA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). For example, one popular ETF tracks the companies in the S&P 500, so buying a share of the ETF gets an investor exposure to all 500 companies in the index. share class has a 0.12% expense ratio. Compared to the 1.28% average expense ratio of its peers (according to Lipper), Vanguard’s cost-conscious approach has made the fund attractive to investors, with more than $64 billion in total assets across its various share classes through year-end 2017. Fidelity Manager To Take Leave Last week, Fidelity announced that Patrick Venanzi would be taking a leave of absence from its Small Cap Growth fund, where he is the sole portfolio manager. He will be away from Fidelity beginning June 1 and is schedule to return on August 30. Venanzi asked to take leave for personal reasons; his health did not factor into his request. Apart from managing Small Cap Growth, he co-manages StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Selector Small Cap and Series Small Cap Opportunities, concentrating on the health care sector. His responsibilities on those funds are shared with three other co-managers, alongside lead portfolio manager Richard Thompson. Venanzi also co-manages Flex Small Cap with Clint Lawrence. Thompson is lead portfolio manager on that fund as well. Jennifer Fo Cardillo and Slava Kruzement will assume lead management of Small Cap Growth effective June 1 in Venanzi’s absence. Cardillo will take over his role on Stock Selector Small Cap and Series Small Cap Opportunities. Both Cardillo and Kruzement will keep Venanzi’s seat warm on Flex Small Cap. The advance notice gives Fidelity plenty of time to prepare for his absence. The funds’ investment objectives and strategies will not be altered as a result, and thus the characteristics of his portfolios are unlikely to change. Before Venanzi leaves, he’ll work closely with his colleagues to review every position and have plans ready for a variety of business, valuation or market outcomes. We don’t believe shareholders in the affected funds have reason for concern. Fidelity has shown in the past that it is well-equipped to handle manager sabbaticals and leaves, and the funds should be in good hands over the three months. Fidelity Small Cap Growth Closes In a move unrelated to Venanzi’s upcoming leave, Fidelity closed Small Cap Growth fund (and its Advisor class clone) to new investors effective February 2. Current shareholders and new investors in 401(k) plansA 401(k) plan is a retirement account that a company sets up on behalf of its employees. Both the participant and the employer can contribute to the account. There are two types of 401(k)s, traditional and Roth. Income invested in traditional 401(k)s isn’t taxed while it’s invested, but is taxed when it’s withdrawn. Income invested in a Roth 401(k) is taxed before it’s invested, but no tax is paid when it is withdrawn. that feature it as an option will be able to add new money, however. Fund closures are not uncommon in the small-cap space, where a fund’s increasing assets under management can limit a manager’s ability to effectively add new names to the portfolio. If a small-cap fund gets too big, the manager will have a harder time buying enough shares of a company with limited market cap to make a difference in the portfolio, and the very act of trading shares could have unintended influence on a stock’s price, harming shareholders. At $4.3 billion in assets through January, Small Cap Growth may have begun to push that threshold. Fidelity said that limiting new purchases was in the best interests of current shareholders, and we agree. About Adviser Investments Adviser Investments is a full service wealth management firm, offering investment management, financial and tax planning, managed individual bond portfolios, and 401(k) advisory services. We’ve been helping individuals, trusts, institutions and foundations since 1994, and have more than 3,500 clients across the country and over $6 billion in assets under management. Our portfolios encompass actively managed funds, ETFsA type of security which allows investors to indirectly invest in an underlying basket of financial instruments (these may include stocks, bonds, commodities or other types of instruments). Shares in an ETF are publicly traded on an exchange, and the price of an ETF’s shares will fluctuate throughout the trading day (traditional mutual funds trade only once a day). 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