Interest fee

Chronic fee chopper Vanguard Group raises prices for nine funds, showing that ‘ownership’ is falling back and forth, cutting fat is getting harder and pricing Vanguard is part art and part algorithm

The $8.1 trillion AUM giant also cut fees on 32 funds and kept fees unchanged at 109 funds, according to year-end fiscal reports, from September to December 2021.

At Vanguard Group, ownership is a privilege, but like most privileges, it goes both ways with investors, who share the benefits of fee reductions and the burden of price increases.

The Malvern, Pa., $8.1 trillion asset manager reminded investors of this harsh reality by raising the fees of nine mutual funds in a series of ongoing disclosures over the past two months.

Freddy Martino: “Expense ratios can change from year to year.

Many of the increases were small, but they also included an eye-watering 50 basis point increase for Vanguard’s Alternative Strategies fund and a 13 basis point fee hike for two categories of its market neutral fund.

Vanguard also cut fees on 32 funds and left fees unchanged on 109 funds, according to fiscal year-end reports, covering September through December 2021.

While the cuts and notable number of increases probably aren’t evidence of Jekyll and Hyde behavior, it still tells a specific story, says Daniel Wiener, president of Newton, Mass., RIA Adviser Investments, per e -mail.

“It’s getting harder and harder to cut costs,” says the longtime Vanguard watcher.

“Their fees stay low on a relative basis, even when they go up. But with fee compression in the industry, their competitive advantage is more in the past than in the present,” he says.

“[For instance]Vanguard recently posted [Dec. 2021 fiscal year-end] reports for 97 different share classes across a host of funds, including many of its largest… [but] 90 out of 97 or 93% saw no change.”

Active gap

Vanguard has applied all nine recent fee increases to active mutual funds, which is an area where there has been a lot of news in the past year as Vanguard has fleshed out its offerings, including even the capital investment.

Daniel Wiener
Daniel Wiener: There were some anomalies where it wasn’t clear who was actually paying for things.

The company has always managed active funds and the recent emphasis was partly related to its desire to upscale its internal RIA to compete against a wider range of competitors. See: After a freemium-like start, Vanguard Group prepares its $243 billion RIA as a profit engine with high-octane, higher-risk, higher-margin proprietary funds.

Changing ratios

There is also increased variability in active funds, which explains the company’s recent fee increases.

“For our active funds which are managed by external advisors, the advisor’s fees are subject to adjustment up or down based on their investment performance relative to the total return of an appropriate benchmark” , Vanguard spokesman Freddy Martino said via email.

“Expense ratios can change from year to year for a variety of reasons, but the primary ones are changes in the fund’s net assets, operating expenses, or both,” he said. explained further.

Today, Vanguard actively manages 43%, or 93 of its 215 funds. The value of active assets under its management is $1.7 trillion, or 21% of the total $8.1 trillion under its management.

Work through the playbook

While Vanguard sells the idea of ​​investor “ownership” of its funds quite broadly, the fee increases also suggest that an ownership calculation is used specifically for individual funds, with their own P&Ls and their own investors.

“Vanguard is owned by the funds managed by the company and therefore owned by its customers,” according to a statement the company made to the SEC in 2019.

Vanguard’s decision to raise fees on nine of its funds also aligns with the playbook where it is using fees from some funds to keep prices lower elsewhere, according to Alec Lucas, Wiener and Morningstar’s strategist for fund research. managers.

“Vanguard has an ‘at cost’ philosophy, but that doesn’t mean that every product is priced so its revenue exactly matches its cost,” Lucas says, via email.

“Historically, for example, Vanguard has used U.S. investment product money to build capabilities for investors outside of the U.S.,” he explains.

Funding cuts with fiscal years ending in September and October 2021 saved Vanguard investors $38.6 million in fees, according to the company.

A hand gives…

Vanguard’s fee increases aren’t new either, according to Martino.

Alex Lucas
Alec Lucas: Vanguard’s “at cost” pricing does not apply to all products.

“While less common than expense ratio declines, Vanguard has reported expense ratio increases in recent years,” he said.

For example, Vanguard recently reduced the fees of three of its bond ETFs by one basis point each on its Total Bond Market ETF (BND), Short-Term Bond ETF (BSV), and Long-Term Bond ETF (BLV). ) following asset growth of 23%, 42% and 8%, respectively. See: Vanguard Group touts itself as ‘alpha’ follower with two new fixed income fund launches as it surpasses PIMCO’s $2 trillion with former Goldman Sachs partner now in charge

However, it has maintained fixed fees for its Total Bond Market II fund (VTBIX) and its mid-term bond ETF (BIV), despite AUM growth of 25% for the former and a decline of 7% assets under management for the second.

In total, Vanguard increased fees on 19% of its funds with fiscal years* ending in September and October 2021. It also increased fees on three (11%) of the 27 funds with fiscal years ending in December 2021.

Specifically, it increased the spending of five active funds by one basis point; on a fund of three basis points; out of two 13 basis point funds and one 50 basis point fund, according to the funds’ year-end reports from September to December.

It also cut the fees of 17 funds by one basis point; on a fund of half a basis point; on one by two basis points; on two funds of four basis points; out of seven funds of five basis points; on two funds of six basis points; out of a nine basis point fund and out of a 10 basis point fund, according to its reports.

Doubtful Territory

The lack of transparency in Vanguard’s fee-setting calculation could lead investors to wonder whether Vanguard is spending its fees keeping costs low on larger branded funds — money market funds in particular, according to Wiener.

“I’m sure there’s a wide [fee] formula, but I think it’s a guideline. There were anomalies where it was unclear who was actually paying for things,” he says.

“How does Vanguard offer fee waivers on money market funds, if they are already ‘priced at cost’, and who pays the costs, likely not currently covered by the very low fees Vanguard collects? ” he asks.

“[It’s] questionable territory,” he adds.

“Current spending limits do not affect other funds’ spending ratios,” Martino counters.

“Vanguard is limiting certain expenses in an effort to maintain an annualized net return of at least 0.01% [for money market funds],” he keeps on.

“We believe this approach is in the best interests of shareholders and that maintaining a viable money market fund offering is important for clients seeking safety of capital,” he adds.

External impulse

Of the nine active funds on which Vanguard has collected fees, four are managed strictly in-house by Malvern, including its Alternative Strategies Fund (VASFX), its Managed Allocation Fund (VPGDX) and two Market Neutral Funds (VMNFX and VMNIX). .

These funds also posted the largest fee increases of 50 basis points, three basis points and 13 basis points, respectively.

More generally, funds managed by outside advisers account for a large number of Vanguard fee hikes, according to Wiener.

“Performance fees can be the main source of fees going up and down… [meaning] active funds where the managers receive performance fees,” he explains.

Typically, Vanguard pays a fixed quarterly fee to external managers — a percentage of a fund’s average daily net assets under management — including a plus or minus percentage adjustment, which depends on the fund’s performance, according to Lucas. .

Often based on a fund’s total return relative to a chosen index, performance fees contain breakpoints, which reduce percentage fee increases as AUM increases, according to Lucas.

quintuple

Of the five externally managed funds for which Vanguard posted fee hikes, firm Wellington Management and Pzena Investment Management manage the $24.4 billion AUM Windsor Fund (VWNDX) and its Admiral stock equivalent (VWNEX) .

Lazard Asset Management, ARGA Investment Management and Sprucegrove Investment Management manage the $15.1 billion International Value Fund (VTRIX).

Donald Smith & Co., Pzena and Cooke & Bieler manage the $6.7 billion AUM Selected Value Fund (VASVX), and Baillie Gifford Overseas, Schroder Investment Management North America, Wellington and TimesSquare Capital Management manage the AUM International fund $2.4 billion Explorer (VINEX).

Vanguard funds and ETFs all report their year ends between August and January. Annual fund reports follow after a maximum of sixty days, and updated prospectuses follow within a maximum of 120 days, according to the company.


* Vanguard reports its fund expense ratios on a rolling twelve-month basis in its annual report, according to the company.