Vanguard Fires Manager, Changes Strategies

Vanguard Takes a New Tack at Six Funds

Sometimes you have to admit when something is not working as well as it should and move on. That appears to be the impetus for Vanguard’s decision to revamp management and strategy for six of its funds, including Asset Allocation, Growth & Income and the four LifeStrategy funds-of-funds at the end of September.

Growth & Income’s Manager Change

While Vanguard avoided pointing fingers, poor performance was at least partially behind its decision to fire Mellon Capital Management as the sub-adviser for Growth & Income. Three new sub-advisers will each now manage one third of the fund’s $4 billion in assets in Mellon’s place. The new roster includes Los Angeles Capital Management’s Thomas D. Stevens and Hal W. Reynolds, D.E. Shaw Investment Management’s Anthony Foley and Vanguard’s own James Troyer, a member of the firm’s Quantitative EquityThe amount of money that would be returned to shareholders if a company’s assets were sold off and all its debt repaid. Group.

The new managers will continue to employ a quantitative approach, using computer models to select stocksA financial instrument giving the holder a proportion of the ownership and earnings of a company.. The former manager’s computers have struggled in recent years, particularly in 2008, when the fund tanked 37.7%, slightly more than its S&P 500 index benchmark. The fund’s annualized performance also trails the S&P 500 over the three-year (-0.6% vs. 1.2%) and five-year periods (-2.6% vs. -1.2%) ended September 30. Over the last year, the fund did slightly outperform its benchmark, but it was a case of too little, too late for Mellon. If the new management setup doesn’t perform to Vanguard’s satisfaction, we wouldn’t be surprised if Growth & Income were merged into one of the firm’s broad-based index funds down the line. For now, we’d advise staying away.

Asset Allocation Closed, Merging with Balanced Index

 
Asset Allocation suffered an even harsher fate than Growth & Income, as Vanguard has fired former manager Mellon, closed the $8.6 billion fund and announced plans to merge its assets with Balanced Index.

While Asset Allocation had the freedom to shift its assets between stocks, bondsA 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. or cash depending on market conditions and former manager Mellon’s quantitative modeling (over the last few years, Mellon had allocated 70% to 100% of assets to stocks, with the remainder in bonds), Balanced Index keeps a static 60%/40% stockA financial instrument giving the holder a proportion of the ownership and earnings of a company./bond mix. Under the supervision of two Vanguard managers–Gregory Davis of the Fixed Income Group and Michael Perre of the Quantitative Equity Group–Asset Allocation will gradually change its makeup to match that of Balanced Index, at which point the funds will be merged.

Here again, it’s likely Mellon has been ousted over performance issues. Through the five-year period ended September 30, the fund delivered an average annual loss of 1.8%, while its benchmark (a 65%/35% mix of the S&P 500 index and the Barclays Capital U.S. Long Treasury 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. index) achieved an average 4.2% annual gain. Last quarter, Mellon’s managers made some ill-timed shifts between stocks and bonds. The fund sold down stocks in mid-August, only to buy them back at higher prices a couple of weeks later, which resulted in a 5.8% loss for the month. Through the end of September, Asset Allocation was down 7.4% for the year, the second-worst performance of all of Vanguard’s balanced funds in 2011.

If you’re currently an Asset Allocation investor and you’re okay with having your investment shifted into a more conservative allocation similar to Balanced Index, you don’t have to lift a finger. If you want to remain in an actively-managed, balanced Vanguard fund, we’d suggest Wellington, which boasts long-term performance better than both Asset Allocation and Balanced Index.

LifeStrategy Funds Go All-Index

Vanguard’s four LifeStrategy Funds, with a combined $25 billion in assets, are abandoning active management. These funds-of-funds, launched in 1994, originally adopted an approach that blended active and passive management by investing in a handful of Vanguard’s offerings.

The four funds will eliminate their exposure to Asset Allocation (which, as noted above, has become a balanced index fund and will soon cease to exist) and Short-Term Investment-Grade. Going forward, all of the assets in these funds will be invested in three broad market index funds (see table below): Total StockA financial instrument giving the holder a proportion of the ownership and earnings of a company. Market Index, Total International Index and Total Bond Market II Index (a clone of Total Bond Market Index used solely in Vanguard’s funds-of-funds).

Unlike Vanguard’s Target Retirement funds, which become more conservative over time, the asset allocations in these funds remain static. Vanguard says the all-index approach will provide more clarity around each fund’s riskThe 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. exposure and will result in lower expense ratios. Eliminating Asset Allocation, where the mix of stocks, bonds and cash could vary significantly from month to month, and which once accounted for as much as 25% of assets in all four LifeStrategy funds, should certainly give investors a clearer picture of their portfolio’s allocation between stocks and bonds. That said, we’ve never been fans of the LifeStrategy lineup, and don’t recommend any of the four options.

About Adviser Investments
Adviser Investments operates as an independent, professional wealth management firm with expertise in Fidelity and Vanguard funds, actively managed mutual 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). 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., fixed-income investing, tactical strategies and financial planning. Our investment professionals focus on helping individual investors, 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., foundations and institutions meet their investment goals. Our minimum account size is $350,000. For the fifth consecutive year, Adviser Investments was named to Barron’s list of the top 100 independent financial advisers nationwide and its list of the top advisory firms in Massachusetts in 2017. We have also been recognized on the Financial Times 300 Top Registered Investment Advisers list in 2014, 2015 and 2016.

For more information, please visit www.adviserinvestments.com or call 800-492-6868.

Disclaimer: This material is distributed for informational purposes only. The investment ideas and expressions of opinion may contain certain forward-looking statements and should not be viewed as recommendations, personal investment advice or considered an offer to buy or sell specific securities. Data and statistics contained in this report are obtained from what we believe to be reliable sources; however, their accuracy, completeness or reliability cannot be guaranteed.

Our statements and opinions are subject to change without notice and should be considered only as part of a diversified portfolio. You may request a free copy of the firm’s Form ADV Part 2, which describes, among other items, risk factors, strategies, affiliations, services offered and fees charged.

Past performance is not an indication of future returns. The tax information contained herein is general in nature, is provided for informational purposes only, and should not be construed as legal or tax advice. We do not provide legal or tax advice. Always consult an attorney or tax professional regarding your specific legal or tax situation.

The Barron’s rankings consider factors such as assets under management, revenue produced for the firm, regulatory record, quality of practice and philanthropic work. This award does not consider client experience and is not indicative of future performance.

Editors at the Financial Times bestowed “elite” status on 300 firms in the U.S., as determined by assets under management, asset growth, longevity, compliance record, industry certifications and online accessibility.

© 2018 Adviser Investments, LLC. All Rights Reserved.