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Thursday, April 3, 2003

Vanguard Says MSCI Move Not Related to Suit

by: Sean Hanna, Editor in Chief

Vanguard has officially cut its ties to Standard & Poor's (S&P) for some of its largest index funds. Yet the Valley Forge-based fund firm insists that its decision to license indices from Morgan Stanley Capital International (MSCI) would have happened even if it had not had its dispute with S&P. Vanguard signed a deal to license the MSCI benchmarks last summer, but did not reveal specifics of its plans until today.

The firm confirmed that it is changing from S&P to MSCI created bogeys on six of its index funds. A seventh fund will be recalibrated against an MSCI index rather than one created by Frank Russell. Vanguard will continue to offer two funds based on S&P indices.

Vanguard said that the change was part of an effort to find indexes that best reflect their market segment and is not fallout from a legal fight the fund firm had with S&P nearly three years ago. That fight arose when Vanguard sought to launch its VIPER ETFs under the same contract by which it licensed the indexes for its mutual funds. McGraw-Hill, S&P's corporate parent, fought back, claiming that the ETFs were new funds, not just new share classes and that Vanguard had to pay additional licensing fees.

McGraw-Hill won the case in a November, 2001 ruling in which the judge found that Vanguard must pay the higher fees.

"The MSCI indexes incorporate most of the best practices we seek in market benchmarks, and we expect them to reflect the performance of the funds' targeted market segments more accurately than any other available index," said Gus Sauter, head of Vanguard's quantitative equity group, in a statement.

Vanguard argued that the new indices should result in efficiencies and lower costs for shareholders.

Vanguard expects to move the funds to the new benchmarks sometime between April 20 and September 30. The funds moving are: Mid-Cap Index; Value Index; Growth Index; Small-Cap Index; Small-Cap Value Index; Small-Cap Growth Index; and Variable Insurance Mid-Cap Index Portfolio.  

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