Vanguard Group Seeks OK for Index Switch
In the latest chapter in Vanguard Group’s dispute with Standard & Poor’s, the mutual fund giant said Monday that it will seek shareholder approval to switch benchmarks for eight of its index-tracking stock mutual funds.
The move may pave the way for Valley Forge, Pa.-based Vanguard to expand it lineup of so-called exchange-traded funds, or ETFs, analysts said.
S&P;, a division of McGraw-Hill Cos., prevailed last year in a lawsuit preventing Vanguard from issuing ETFs based on the S&P; 500 and the “growth” and “value” subsets of the blue-chip index.
ETFs are baskets of stocks or bonds, like mutual funds, but are priced throughout the day like regular stocks. They have become highly popular over the last two years, especially with traders.
Vanguard said the index switch, if approved by shareholders, would not apply to its well-known 500 Index fund, which tracks the S&P; 500, but would involve these index funds: Total Stock Market; Extended Market; Growth and Value (both of which are large-cap funds); Mid-Cap; Small-Cap, Small-Cap Growth and Small-Cap Value.
Gus Sauter, who oversees Vanguard’s $200 billion in equity index fund assets, indicated that Vanguard is less than thrilled with the indexes it now is using as benchmarks.
“Over time, we’ve developed our own views with respect to best practices in index construction and rebalancing methodology,” he said. “Index providers have been exploring many of these same ideas and we are beginning to see opportunities open up that we believe may be worth pursuing.”
Vanguard said it has secured the right to use new indexes under development by Morgan Stanley Capital International, though it wouldn’t be obligated to use them. In the cases of the funds it named, Vanguard would be replacing five S&P; indexes, two indexes maintained by Wilshire Associates and one from Frank Russell Co.
A switch to new indexes could occur in 2003, Vanguard said.
Though Vanguard has issued ETFs mimicking its Total Stock Market and Extended Market funds, analysts speculated that a deal with MSCI could allow the fund company to greatly expand its ETF lineup as early as next year.
“There’s no question this is a market-driven strategy,” said Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter in Potomac, Md. “They want to offer ETFs, and what [Vanguard Chairman] Jack Brennan is saying to S&P; is, ‘I’m taking my ball and playing somewhere else.’ ”
For the open-end mutual funds involved, switching indexes could prompt portfolio turnover. But Wiener said the changes probably would not trigger capital gains distributions, because of offsetting losses the funds have on the books from the long bear market.
Vanguard to Refocus Utility Stock Fund
Vanguard is pulling the plug on its utility-stock fund.
The firm said Monday that it wants to transform the Vanguard Utilities Income Fund, with $656 million in assets, into the Vanguard Dividend Growth Fund, to give its portfolio managers a wider swath of dividend-paying shares from which to choose.
Utilities, including electric companies and telecom firms, once appealed to conservative investors in search of above-average dividends.
But deregulation of the electric and telecom industries in the 1990s injected instability, and higher risk, into many of the stocks. Many electric and telecom companies in recent years de-emphasized dividend payments and pitched themselves as growth firms.
“Growing up, parents talked about buying utility stocks to get stability and rich dividends, but today it’s a different industry,” said Brian Mattes, a Vanguard spokesman. “If you had bought the fund for that reason, you’re not quite getting what you wanted.”
As the Dividend Growth Fund, the portfolio would seek out high-dividend stocks across all industries, Vanguard said.
Changing the fund’s focus will require the approval of shareholders and the Securities and Exchange Commission.
Reuters
