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Vanguard Moves to Merge Away Asset Allocation Fund

Firm seeks to ultimately combine the tactical fund into Vanguard Balanced Index.

Jason Stipp, 09/30/2011


Vanguard is making preparations to phase out the $8.6 billion actively managed Vanguard Asset Allocation Fund VAAPX, according to details in a press release posted Friday, with ultimate plans to merge the fund into Vanguard Balanced Index Fund VBINX.

Leading up to the proposed merger, the Asset Allocation Fund will be phased out of the Vanguard LifeStrategy fund of funds series, according to the press release. The LifeStrategy funds will gradually move to an all-index approach and eliminate exposure to the actively managed Asset Allocation Fund and Vanguard Short-Term Investment-Grade Fund VFSTX. The LifeStrategy funds will then invest solely in their three broad market index component funds: Vanguard Total Stock Market Index VTSMX, Vanguard Total International Stock Index Fund VGTSX, and Vanguard Total Bond Market II VTBIX.

In the same release, Vanguard announced that its Quantitative Equity and Fixed Income Groups have assumed management responsibilities on the Asset Allocation Fund from Mellon Capital Management, and Vanguard is modifying Asset Allocation's strategy to a fixed 60/40 stock/bond portfolio, like the Balanced Index Fund. Vanguard said it has filed a preliminary proxy statement with the SEC that seeks shareholder approval for the merger.

The Asset Allocation Fund formerly followed a more flexible approach that allowed management to invest up to 100% of fund assets in stocks, bonds, or money market instruments based on the managers' risk/return expectations. That flexibility has led to extremely mixed results. An equity-heavy stance contributed to peer-beating gains in 2010, as well as bruising losses in 2008's bear market.

Vanguard also announced Friday that the $4 billion Growth & Income Fund VQNPX has adopted a multi-manager approach, with three advisors assuming investment advisory responsibilities from Mellon Capital. The new advisors, each of which manage approximately one-third of the fund's assets, are Los Angeles Capital Management, D.E. Shaw Investment Management, and Vanguard's Quantitative Equity Group. The fund's investment strategy will not change and the advisors will continue to follow a quantitative approach, according to the release.

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Jason Stipp is Site Editor for Morningstar.com
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