Fund Times: Vanguard Alters Fees for Tax-Managed Funds

Vanguard Removes Redemption Fees for Tax-Managed Funds
Vanguard eliminated the 2% redemption fees for shares held less than one year on five tax-managed funds, effective Sept. 15, 2005. Specifically, investors in  Vanguard Tax-Managed Balanced (VTMFX),  Tax-Managed Growth and Income ,  Tax-Managed Capital Appreciation ,  Tax-Managed Small-Cap (VTMSX), and  Tax-Managed International (VTMGX) will now be subject to only a 1% redemption fee for shares held less than five years.

Redemption fees were originally introduced to help ensure that short-term traders paid their fair share of overall fund costs. These fees at least partially reimburse long-term shareholders for the negative impact of rapid trading. We think that redemption fees are generally a good idea. While Vanguard was not caught up in the fund market-timing scandal, it still behooves the firm to protect long-term shareholders from the damage the short-term traders can inflict.

Active ETFs?
A small New Jersey firm cofounded by one of the biggest behind-the-scenes names in the exchange-traded fund (ETF) business thinks it has cracked the code of actively managed ETFs. It remains to be seen if federal regulators will agree.

Managed ETF LLC has filed an application with the Securities and Exchange Commission as well as a patent application with the U.S. Patent Office for its actively managed ETF format. The firm is founded by entrepreneur Todd J. Broms and Gary Gastineau (a former executive of the American Stock Exchange, Nuveen Investments, and other firms), who has been deeply involved in ETF development and debate for years.

Actively managed ETFs are considered by many to be next great frontier for the ETF universe, which has grown tremendously in recent years on the back of index funds. The vehicles have to solve several conundrums before they become a reality, though. ETFs, as they are currently structured, have to disclose their portfolios and net asset values every 15 seconds throughout the trading day to enable their unique in-kind creation/redemption process. No active fund manager wants to (or should want to) disclose his or her portfolio that often. Doing so would tip off other traders and investors about a fund's latest portfolio moves.

Managed ETF plans to get around this by telling market participants which securities they need to compile the baskets of securities required for creations and redemptions, but, at the same time, masking the fund's recent buys and sells, according to SEC filings. Instead of disclosing the ETF's actual NAV every 15 seconds, Managed ETFs also proposes revealing the precise number every hour and a mathematically modified version every 15 seconds, the filing said.

The firm hopes to launch at least one value, growth, and quantitative equity fund, but it's difficult to say if we'll ever seen a offering based on this methodology. There are other proposals for actively managed ETFs out there, including one from Gastineau's former employer AMEX. And it could take a long time for the SEC to determine if any of them are safe for investors.

ING Offers Unique Aid to Louisiana Disaster Victims
ING Funds will waive contingent deferred sales charges (CDSC), or loads, on redemptions made between Aug. 29, 2005, and Oct. 28, 2005, for class A, B, and C shares for the fund of residents of 64 Louisiana parishes, 52 Mississippi counties, six Alabama counties, and three Florida counties. The applicable funds include ING Senior Income (XSIAX), the Domestic Equity Value funds, the Global Equity fund, International Equity, the Domestic Equity Growth funds, the Domestic Equity and Income Funds, the Fixed Income funds, the Money Market funds, the International Equity funds, the International Global Equity funds, and the ING Principal Protection Funds. The exception will not apply to exchanges.

Kudos to ING for potentially taking a real dollar loss in order to make it a little easier for victims of the Katrina disaster. Then again, it's hard to imagine that a) they've got a huge asset base along the gulf coast and b) that they're going to be suddenly hit by a wave of redemptions. Moreover, even though many investors are probably unaware, most B share prospectuses allow a waiver of CDSC charges for disability and certain other extraordinary events (such as natural disasters).

Harbor Ditches Former Mid-Growth Subadvisor for Wellington
What should a fund advisor do when one of its funds consistently underperforms and only attracts measly asset inflows? Fire the subadvisor. Toledo, Ohio-based Harbor Capital Advisors seems to have followed this path in appointing a new subadvisor to its mid-cap growth fund,  Harbor Mid Cap Growth (HAMGX). Wellington Management's Michael Carmen is replacing William Jeffery and Ken McCain of Wall Street Associates as portfolio manager. To date, the fund has lagged its mid-cap growth peers, finishing near the bottom quartile of the category in three out of the past four years. A significant overweight in the energy sector has helped this year, but it appears that Harbor wants to take the fund in a different direction to boost performance and its paltry asset base of $51 million.
 
We find it encouraging that the fund selected Wellington and Carmen to run the show, albeit with certain reservations. Carmen has established a good record as the manager of  Hartford Growth Opportunities (HGOAX), beating its Russell 3000 Growth Index benchmark and many of its mid-cap growth peers. Wellington's huge team of experienced research analysts has been an asset for the Hartford fund and will remain so here. Hartford Growth Opportunities is an all-cap fund, so it will be interesting to see how much Carmen must adjust his management to what would seem to be a more straightforward mid-cap mandate here. We're optimistic that Carmen will do well, but investors who use this as an exclusively mid-cap vehicle in their overall diversified portfolios should keep a close eye on the fund.

Etc.
Longtime manager Kent Simons is retiring from  Neuberger Berman Focus (NBSSX) after 15 years at the helm. However, he still plans to provide some assistance to remaining comanager Robert Corman. The large-blend fund has provided good long-term performance (top-quartile returns in its category for the trailing five- and 10-year periods), although it may at times exhibit high short-term volatility due to its concentrated portfolio of 25 to 30 names in the financial and technology sectors. Corman, who plans to tone down the fund's volatility over time, has been on the fund since November 2003 and is an experienced comanager in his own right; with more than $1 million of his own money invested in the fund, we don't believe investors have much to worry about.

 Van Kampen Strategic Municipal Income  is closing to new investors on Sept. 21, 2005. Managed by Dennis Pietrzak and Wayne Godlin, the high-yield muni fund has experienced liquidity problems due its heavy holdings of infrequently traded nonrated issues. Godlin had recently tried to shift the fund's holdings into more investment-grade bonds with only 50% in high-yield municipal bonds. Godlin's other, better performing fund,  Van Kampen High-Yield Municipal (ACTHX), has benefited from closings in the past, as the closings gave him time to put new cash to work. We hope that the closing at Strategic Municipal Income will provide similar benefits for investors.