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Vanguard Set to Venture Into Low-Volatility Space

Likely available before the end of 2013, Vanguard's new fund will be actively managed.

Morningstar Fund Analysts, 10/03/2013

On Sept. 27, 2013, Vanguard filed a preliminary prospectus with the Securities and Exchange Commission for a new fund, Vanguard Global Minimum Volatility Fund, which will invest in stocks around the globe. Vanguard expects the fund to be available in the fourth quarter of 2013. The fund will have two share classes, Investor and Admiral, with projected expense ratios of 0.30% and 0.20%, respectively.

Vanguard has been considering low-volatility options for at least three years. Unlike existing offerings in the low-volatility exchange-traded fund space, however, Vanguard says its fund will be actively managed as opposed to passively managed--somewhat surprising considering Vanguard's dominance and expertise in index funds. The fund won't be subadvised, either, as many of the firm's actively managed funds are. Instead it will be run by the firm's quantitative team, the Active Equity Group, which is now under fairly new leadership in John Ameriks. Ameriks, who assumed his current post in early 2013, is a Vanguard veteran and was instrumental in designing Vanguard's target-date funds and endowment-like managed-payout funds. The managers named in the prospectus are James Troyer, James Stetler, and Michael Roach.

Vanguard will look to invest in names that have exhibited lower volatility relative to other stocks in the FTSE Global All-Cap Index (USD Hedged). It also will consider correlations among stocks when constructing the portfolio. The FTSE Global All-Cap Index includes emerging markets, which can be volatile in and of themselves, but which also can provide diversification benefits and potentially reduce a broad portfolio's volatility over the long haul. The managers will hedge most of the portfolio's currency exposure; doing so can have a meaningful impact on a fund's volatility (and performance relative to actively managed global-equity peers). Although the fund will be actively managed, Vanguard's Active Equity Group typically aims for returns that are highly correlated with designated benchmarks.

Fidelity Announces Major Changes to Its Glide Path
Fidelity Investments just announced the latest in a series of recent and expected changes to its $170 billion line of Fidelity Freedom Funds target-date investments. In this round, investors will soon see equities play a more prominent role throughout the portfolios. Those on the brink of retirement in the 2015 fund will see a modest increase in the allocation to stocks, to 53% from roughly 50% currently. Investors entering their early middle ages will see the biggest change, as Fidelity will now hold the series' 90% maximum allocation to equities constant until investors reach their mid-40s. Currently, those investors are largely in the 2035 fund, which has a bit more than 80% allocated to stocks.

The changes are expected to roll out over the next several months and will make the Freedom Funds' overall asset allocation more closely resemble its two largest competitors, the Vanguard Target Retirement and T. Rowe Price Retirement target-date funds. Morningstar data shows that both competitors also start out by holding 90% of assets in stocks, with the former also holding that allocation steady until the 2035 fund, and the latter just beginning to modestly decrease its allocation to stocks at that point.

Fidelity last made major changes to its glide path in 2006, when an extension of its asset-allocation rolldown period resulted in a relatively larger equity stake for investors going into retirement. According to 2011 research released by Morningstar subsidiary Ibbotson Associates, the Freedom Funds' glide path has been relatively unstable, and that's especially true compared with the Vanguard and T. Rowe Price offerings.

The firm cites changing capital-market and asset-class assumptions as among the key reasons for this update, and the resulting boost in assets allocated to stocks should also help the series to better keep up with peers going forward. A comparatively risk-averse glide path has been a strong contributor to the Freedom Funds' disappointing long-term results. Over the last five years through September 2013, for instance, nine of the 12 Freedom Funds that have been around for that long trail their respective peer medians. Meanwhile, all of the Vanguard funds with at least five years of history rank in the top third of their groups, while the T. Rowe Price funds largely rank in their categories' top percentiles.

Those numbers have contributed to Fidelity's dwindling share of the target-date mutual fund market, though a few other general industry trends (such as a movement to index-based strategies) haven't helped. Flows into Fidelity's target-date strategies have remained positive--helped along by a set of index-based series launched in late 2009--though Fidelity's 8.2% organic growth in 2012 is well below Vanguard's 21.3% growth, as well as T. Rowe Prices 11.6% increase. From 2006 to 2012, Fidelity's overall market share of target-date mutual funds has declined to 32.4% at the end of 2012 from 47.8% in 2006.

Morningstar fund analysts cover more than 1,700 mutual funds and write regular commentary covering fund industry news, fund investing trends, picks, portfolio planning, international investing, and more.

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