Coding error and subsequent changes sapped confidence in the firm.
Vanguard took more time and was more deliberate than many clients of AXA Rosenberg in deciding how to handle the subadvisor's belated revelation of a coding error in one of the computer models it uses to run money. Ultimately, however, Vanguard reached the same decision that other firms did sooner: It was time to part ways.
Vanguard has fired quant manager AXA Rosenberg as a subadvisor of Vanguard Explorer
AXA had been on the bubble since it disclosed in April 2010 that it had discovered and fixed a coding error the previous year without ever notifying clients. A computer programmer made a mistake in coding one of the firm's risk models in 2007, but it wasn't noticed until later, and AXA personnel failed to report the problem to senior management until months after it was discovered. Since then, heads have rolled--including that of cofounder Barr Rosenberg--ownership has changed, and organizational changes have been made.
The error, communication delay, and restructuring, however, came as the firm was still struggling with disappointing performance. More than 80% of the firm's separate accounts in Morningstar's database with three-year records ranked in the bottom half of their Morningstar categories in the three years ended June 30. More than 90% of AXA Rosenberg's separate accounts in Morningstar's database with five-year records trailed most of their peers in that time as of midyear. The combination proved to be too much for many institutional clients. Pensions & Investments reported last month that the firm's assets under management had dropped by 40% in the second quarter, due to market losses and outflows.
Vanguard didn't rush to judgment, but the low-boiling controversy ultimately proved to be too much for it, too. "I can't say it was any one thing, but rather an accumulation of things," said Chris McIssac, a member of Vanguard's portfolio review department that hires, monitors, and fires subadvisors.
Quant strategies have been under the gun in recent years, but the AXA ouster doesn't mean Vanguard is abandoning the approach. U.S. Value and Market Neutral will remain quant funds, and Vanguard's QEG still manages several whole portfolios, such as Vanguard Strategic Equity
AXA Rosenberg's Bad Week
Principal Funds also dropped AXA Rosenberg as a subadvisor to Principal International Value
American Funds Launches Two New Bond Funds
American Funds has filed with the SEC to launch two new fixed-income offerings: the Mortgage Fund and the Tax-Exempt Fund of New York. As with other American funds, a team of portfolio counselors will run them, and investors will be able to buy shares Dec. 1. Information on expenses is not yet available.