Vanguard Cleans House with Mergers
Under the guise of streamlining its fund lineup, Vanguard is sweeping some redundancies and failures under the rug through a series of fund mergers, while also giving more investors access to lower-expense Admiral shares.

On the cost-cutting front, Vanguard announced that it is opening up Admiral shares to many more investors—retail investors, financial advisors and institutions. Minimums are coming down or being removed, transaction fees are shrinking and a handful of funds, including Dividend Appreciation Index, are adding Admiral shares. This is all part of Vanguard’s plan to phase out its higher-minimum Signal share class over time. These moves acknowledge that ETFs are taking market share and pushing costs down across the industry. If the side effect is lower fees for Vanguard investors like you and me, I’m all for it.

The real news is the mergers. First up, Tax-Managed Growth and Income is being folded into 500 Index. These two funds track the same benchmark, the S&P 500 index, and I have long argued that the tax-managed version was unnecessary. The marketing behind Tax-Managed Growth and Income was that it didn’t pay out capital gains. Well, 500 Index hasn’t paid out capital gains over the past decade either. And if you are really worried about taxes, you’re probably going to look at an ETF anyways.

The same reasoning applies to Developed Markets Index absorbing Tax-Managed International, as both seek to track the same FTSE Developed ex North America index.

Next up, Growth Equity is being merged into U.S. Growth. Both funds received new shots at life in the past five years when their underlying managers were replaced. The merger is yet another attempt at redemption. For a little background, Growth Equity suffered for years from the missteps of its original manager, Turner Investments. In 2008 and 2009, Baillie Gifford and Jennison Associates were brought in to right the ship. At U.S. Growth, AllianceBernstein was finally shown the exit in fall 2010, when Delaware Investments and Wellington Management joined existing manager William Blair & Co. on the fund. As Dan and I discussed in the September 2013 issue of The Independent Adviser for Vanguard Investors, in both situations, performance has improved under the new multi-manager regimes, but while staying afloat is better than sinking, it isn’t enough to inspire confidence. It looks like Vanguard’s board agrees.

But does this really solve the issues facing these funds? It does remove Growth Equity’s track record from the page. But now we are left with one fund managed by five different shops—Baillie Gifford, Delaware, Jennison, Wellington and William Blair. Just like at Morgan Growth, with five firms stirring the pot, no one can do too much damage on their own—but they can’t really drive performance higher either. What we’ll end up with is a no-conviction portfolio that will look a lot like the index, only more expensive. At that point, why not just buy the index?

Finally, the Managed Payout funds are being merged into one offering, which will be renamed Vanguard Managed Payout. It was only two months ago that Dan and I pointed out that the Managed Payout funds were failing to deliver on their objectives, and that change was in the air. Well, here it is. The new fund will have an annual distribution target rate of 4%. This lower target rate of 4% should be easier to meet than the 5% rate that Managed Payout Growth and Distribution Fund promised. Time will tell if Vanguard will be able to deliver on this new goal, but I remain skeptical of one-size-fits-all solutions, and if Vanguard’s record so far on the Managed Payout experiment is an indication, you should be skeptical too.