VALLEY FORGE, PA (October 16, 2013)—Vanguard plans to streamline its investment offerings by merging five funds, including two index funds, an actively managed growth fund, and two retirement income funds.
“Over the past five years, we have moved to simplify our funds and our overall fund lineup. In a continuation of that effort, we have decided to merge a handful of funds that have similar objectives and strategies,” said Vanguard CEO Bill McNabb. He noted that Vanguard, in a related announcement, is paring the number of its fund share-class offerings (see press release titled “Vanguard Increases Access to Admiral Shares to Bring Lower Costs to More Clients”).
The planned mergers, which are expected to take place over the next several months, are summarized below:
Vanguard plans to merge the $16.3 billion Vanguard Developed Markets Index Fund with the $18.4 billion Vanguard Tax-Managed International Fund. The funds share similar holdings and seek to track the same benchmark—the FTSE Developed ex North America Index. The merged fund—to be named Vanguard Developed Markets Index Fund—will offer Investor, Admiral™, Institutional, Institutional Plus, and ETF Shares.
Two funds that seek to track the Standard & Poor’s 500 Index will also be merged. The $3 billion Vanguard Tax-Managed Growth and Income Fund will be merged with the $143 billion Vanguard 500 Index Fund. Shareholders of the Tax-Managed Growth and Income Fund will benefit from the lower expense ratio (0.05%) of the Admiral Shares of the 500 Index Fund.
A merger of the $738 million Vanguard Growth Equity Fund and the $4.4 billion Vanguard U.S. Growth Fund is also planned. The two actively managed large-capitalization growth funds seek to provide long-term capital appreciation and employ a fundamental stock-selection process that emphasizes stocks with strong earnings potential. Both also utilize a multi-manager structure. Following the merger, the U.S. Growth Fund will retain its current advisors (Delaware Investments Fund Advisers, Wellington Management Company, LLP, and William Blair & Company L.L.C.) and will add Baillie Gifford Overseas Ltd. and Jennison Associates LLC from the former Growth Equity Fund.
Shareholders of the Growth Equity Fund will experience a reduction in annual costs following the merger, as the expense ratio of their current fund is 0.54%, compared with the 0.45% expense ratio of Investor Shares and the 0.31% expense ratio of Admiral Shares of the U.S. Growth Fund.
The three portfolios of the Vanguard Managed Payout Fund series will also be consolidated into a single fund. Two funds—the $804 million Vanguard Managed Payout Distribution Focus Fund and the $110 million Vanguard Managed Payout Growth Focus Fund—will merge into the $531 million Vanguard Managed Payout Growth and Distribution Fund, which will be renamed Vanguard Managed Payout Fund.
Introduced in May 2008, the Managed Payout Funds were designed to supplement an investor’s retirement income, with each fund featuring specific payout and principal objectives. The funds have faced challenges in meeting their objectives, given a financial market environment marked by a prolonged period of historically low bond yields. The funds also encountered difficulties gaining investor acceptance and understanding, given that the managed payout concept is relatively new, coupled with the complexity of the funds’ strategies and payout formulas.
The remaining fund will adopt a new annual distribution target rate of 4% (from 5%) and continue to adhere to a total return-based approach by allocating its assets across Vanguard funds that invest in a broadly diversified selection of investments, including stocks, REITs, bonds, cash, inflation-linked investments, and selected other exposures, such as commodities and market-neutral investments. Vanguard research indicates that a 4% payout offers a higher probability of providing a stable income stream that can be sustained over the 20-30 year retirement period of the typical retiree.
“After careful consideration of the funds’ investment objectives and payout records, along with our expectations for future stock and bond returns, the funds’ Board of Trustees determined that the merger was the prudent course of action,” said Mr. McNabb. “We remain committed to an all-in-one option for retirees and believe a single fund will simplify our managed payout offering and better serve clients’ needs going forward.”
Effective October 16, 2013, the five funds—Developed Markets Index, Tax-Managed Growth and Income, Growth Equity, Distribution Focus, and Growth Focus—will no longer be open to new investors. Existing shareholders will be permitted to make additional investments in these funds prior to the mergers.
The funds are not expected to recognize any gains or losses as a result of the mergers.
Vanguard, headquartered in Valley Forge, Pennsylvania, is one of the world’s largest investment management companies and a leading provider of company-sponsored retirement plan services. Vanguard manages nearly $2.3 trillion in U.S. mutual fund assets, including more than $300 billion in ETF assets. The firm offers more than 160 funds to U.S. investors and more than 100 additional funds in non-U.S. markets. For more information, visit vanguard.com.
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All asset figures are as of September 30, 2013, unless otherwise noted.
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The above-referenced mergers will not result in the issuance of additional ETF shares for the Vanguard Developed Markets Index ETF and Vanguard S&P 500 Index ETF. Creations and redemptions of the ETF shares will continue as described in the respective ETF prospectus and statement of additional information.
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