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Vanguard Gives AXA Rosenberg the Ax

Coding error and subsequent changes sapped confidence in the firm.

Morningstar Analysts, 08/16/2010

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 VEXPX, Vanguard U.S. Value VUVLX, and Vanguard Market Neutral VMNFX little more than three years after hiring the firm for the first two funds and adopting the third. The remaining subadvisors of those funds will take up AXA's roughly $1.8 billion in assets for now, Vanguard said. That means the fate of U.S. Value and Market Neutral, which have both struggled to compete with their peers and meet their objectives in recent years, will rest solely with Vanguard's own Quantitative Equity Group that, until recently, had managed about half of each fund. The change leaves Explorer with six subadvisors, five of whom are bottom-up fundamental managers.

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. PAGEBREAK

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 VSEQX, and portions of others. McIssac also allowed that Vanguard could hire additional new quant subadvisors in the future.

AXA Rosenberg's Bad Week
Principal Funds also dropped AXA Rosenberg as a subadvisor to Principal International Value PINZX this week, according to a recent filing. The fund, which has about $1 billion in assets, is replacing AXA with David A. Hodges and Randolph S. Wrighton from Barrow, Hanley, Mewhinney & Strauss.

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.

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