BOSTON (AP) — Vanguard on Friday announced strategic and management changes at six of its mutual funds.
Five mutual funds will begin to exclusively employ a low-cost index investing approach, rather than relying partly on professional managers to guide investment selection.
In addition, Vanguard is replacing an outside manager at another fund in favor of a multi-manager approach.
Vanguard is the nation's largest mutual fund company, with $1.6 trillion in U.S. fund assets in its lineup of more than 170 funds.
Here's a rundown of the key changes:
— Vanguard LifeStrategy funds
Vanguard's LifeStrategy funds were launched in 1994 with a blended investment strategy. That means part of their $25 billion in assets is invested in actively managed mutual funds, and some money is invested in index funds, which passively track market indexes.
But changes were announced for all four funds in this series: LifeStrategy Growth, LifeStrategy Moderate Growth, LifeStrategy Conservative Growth, and LifeStrategy Income. These stock-and-bond funds will now invest solely in three Vanguard index funds rather follow a blended strategy, which meant also investing in pricier actively managed funds.
The three underlying Vanguard index funds are Total Stock Market Index, Total International Stock Index, and Total Bond Market II Index. In coming months, fund holdings will be gradually shifted away from the two actively managed funds that have historically been part of the LifeStrategy portfolios.
Once the transition is completed, expense ratios for the funds are expected to range from 0.14 percent to 0.18 percent. That equals $14 to $18 per year for every $10,000 invested — about $2 to $4 less than current expenses.
The LifeStrategy funds' portfolios range from as much as 80 percent in stocks to as little as 20 percent, with the rest invested in bonds. The mix in each fund remains static, unlike with target-date funds, in which the portfolio becomes more conservative as an investor's retirement approaches.
— Vanguard Asset Allocation:
Vanguard is seeking approval from fund shareholders to merge this $8.6 billion fund into the $11 billion Vanguard Balanced Index Fund, which charges slightly lower expenses.
That move would involve switching Asset Allocation to a portfolio that maintains a constant 60 percent stocks-to-40 percent bonds balance, rather than shifting the asset mix based on the manager's outlook for investment risk and returns. Previously, Asset Allocation's managers were given flexibility to invest as much as 100 percent in one asset category.
The changes will provide competitive returns over the long-term with less risk, said Bill McNabb, CEO of privately owned Vanguard, based in Valley Forge, Pa.
In addition, management of the fund will shift from Mellon Capital Management Corp. to Vanguard's quantitative equity and fixed income groups.
Performance at the 23-year-old fund has recently lagged the vast majority of comparable funds. Vanguard Asset Allocation averaged an annualized loss of 1.5 percent over the past 5-year period, trailing 96 percent of the funds in its moderate-allocation category, according to Morningstar. This year, the fund has lost 5.9 percent, trailing 68 percent of its peers.
— Vanguard Growth & Income:
This $4 billion fund is being switched to a multi-manager approach, with three investment advisers assuming responsibility from Mellon Capital Management. The following advisers will each be responsible for managing one-third of the portfolio: Los Angeles Capital Management, D.E. Shaw Investment Management, and Vanguard's quantitative equity group.
The fund's managers will continue to employ a quantitative investing approach, using computer programs to select a diversified group of stocks. Those programs are based on investing formulas that experts devise and translate into computer code.
Many quant funds suffered poor relative performance during the 2008 financial crisis, when many theories about investment performance didn't hold up. Formulas that quant funds use are largely based on how stocks have performed in the past, which won't necessarily guide what they do in the future.
Performance at Vanguard Growth & Income has topped that of most of its peers recently, with its 6.4 percent loss this year beating about four-fifths of large-blend stock funds. But over the past 5-year period, the fund's average annualized loss of nearly 2.2 percent is worse than 74 percent of its peers.