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Vanguard shifts strategy for six of its mutual funds

By Mark Jewell
Associated Press / October 2, 2011

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Vanguard on Friday announced strategic and management changes at six of its mutual funds. Five funds will begin to 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 multimanager approach. Vanguard is the largest US mutual fund company, with $1.6 trillion in its lineup of more than 170 funds.

Here’s a look at key changes:

Vanguard LifeStrategy funds: These 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 funds will now invest solely in three Vanguard index 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 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 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 nears.

Vanguard Asset Allocation: Vanguard is seeking approval from fund shareholders to merge this $8.6 billion fund into the $11 billion Balanced Index Fund, which charges 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 risk and returns. Previously, Asset Allocation’s managers were given flexibility to invest as much as 100 percent in one category.

The changes will provide competitive returns over the long-term with less risk, said Bill McNabb, chief executive of privately owned Vanguard.

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 fund has recently lagged the majority of comparable funds. Asset Allocation averaged an annualized loss of 1.5 percent over the past five years, trailing 96 percent of the funds in its category, according to Morningstar. This year, the fund has lost 5.9 percent.

Vanguard Growth & Income: This $4 billion fund is being switched to a multimanager approach, with three investment advisers assuming responsibility from Mellon Capital Management. The following will each manage 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 stocks.

Many quant funds suffered poor relative performance during the 2008 financial crisis. Formulas that quant funds use are largely based on how stocks have performed in the past.

Performance at 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 five years, the fund’s average annualized loss of nearly 2.2 percent is worse than 74 percent of peers.