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Vanguard Moves Closer to Offering a Hedge Fund

Plus, Jensen's Millen to retire, new SEC money market rules, two Royce funds close, and more.

Morningstar Analysts, 02/01/2010

Vanguard has taken another step toward offering an "absolute return" fund, more than two years after Morningstar first reported that the family was experimenting with a hedge fund.

Vanguard has filed an exemptive relief application with the SEC seeking the OK to launch an absolute return fund (one that attempts to achieve positive returns in all markets) that would be used as a component of the family's Managed Payout Funds. Vanguard essentially wants to create a separate, off-shore alternative strategies fund that would invest in a wide range of alternative strategies at lower cost and with less risk than the Managed Payout Funds could do on their own directly, according to the filing. The alternative strategies fund is a subfund of an umbrella fund called Vanguard Investments Select Series I, PLC, which is registered in Ireland as a limited liability variable capital corporation.

The SEC could take a long time to approve the application, a Vanguard spokesman said. Even then Vanguard still has not decided if it will launch the fund, said Vanguard CEO Bill McNabb in an interview in the current edition of Morningstar's Vanguard Fund Family Report. "We have been doing a ton of work to see whether it's something we can deliver in a consistent manner, and the jury is very much out at this point," McNabb said. "It's not something we're going to do until we feel really great about it."

Nevertheless, Vanguard is proceeding methodically as if the hedge fund will become a reality. According the filing, each of Vanguard's three Managed Payout Funds (and possibly other Vanguard funds in the future) would invest up to 20% of its assets in the alternative strategies fund. The Managed Payout Funds use an endowmentlike strategy to convert shareholder nest eggs into streams of income that will grow and last throughout investors' retirement years. Vanguard says the alternative strategies offering will provide Managed Payout investors improved diversification and reduced volatility and risk, because the new fund would attempt to have a low correlation to stocks and bonds.

The alternative strategies fund will employ a number of strategies and may invest in stocks, bonds, hybrid securities, commodities, futures contracts, currencies, and other asset classes. It can also use leverage, derivatives, and short sales.

This is another example of how Vanguard is evolving from its roots as a purveyor of low-cost index funds and sober stock and bond funds like Vanguard Wellington VWELX. Vanguard founder Jack Bogle has been an outspoken critic of Putnam's absolute return funds. Unlike Putnam, however, Vanguard's absolute return fund would be available only as part of the Managed Payout Funds, at lease initially, according to the filing.

Jensen's Bob Millen to Retire Next Year
Jensen Investment Management informed investors this week that Bob Millen, firm chairman, investment committee member, and portfolio manager of Jensen Fund JENSX, plans to retire in the first quarter of 2011.

The management bench here is deep, so this Fund Analyst Pick will remain in good hands. "This team has seen managers retire before, including firm founder Val Jensen, and the fund hasn't skipped a beat," said Morningstar analyst Greg Carlson. Robert Zagunis joined the team in 1993, Eric Schoenstein was promoted from analyst to manager in 2004, Robert McIver was promoted to manager in 2005, and Kurt Havnaer was named a manager in September 2007. Alan Bond and Kevin Walkush will continue to serve as analysts on the fund, and they will be joined by new analyst Adam Calamar.

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