Vanguard Moves Closer to Offering a Hedge Fund

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.

The team will maintain the fund's distinctive approach. They consider only stocks with returns on equity of at least 15% for each of the past 10 years and that are also trading at a discount to intrinsic value. Not surprisingly given these parameters, this is a concentrated portfolio of 25-30 stocks. The fund tends to lose less than its peers in down markets but lag in roaring markets (as was the case in 2008 and 2009). Its 10-year return tops 97% of large-growth rivals' and the S&P 500 Index's.

SEC Tightens Money Market Rules
This week, the SEC approved stricter rules to better regulate money market funds, with the aim of improving disclosure of a fund's investments and risks and bettering funds' ability to withstand economic crises. The agency began a thorough review of money market fund regulations after the Reserve Primary Fund "broke the buck" by allowing its net asset value to fall below $1 per share in September 2008.

Among the new rules: the adoption of minimum liquidity standards. All taxable money market funds must keep 10% of assets in cash, U.S. Treasuries, or securities that convert into cash within one day. And all money market funds must stash at least 30% of assets in cash, U.S. Treasuries, other government securities with maturities of 60 days or less, or securities that convert to cash within a week. Illiquidity requirements were strengthened: illiquid securities (now defined as those that can't be disposed of within seven days) can account for only up to 5% of fund assets, down from the current limit of 10%.

The SEC also announced rules to further restrict credit quality, including lower limits on how much money market funds can invest in second-tier (lower-quality) securities and tightened restrictions on how much a fund can invest in second-tier securities from a single issuer. Finally, funds can't buy second-tier securities that mature in more than 45 days. The current limit is 397 days.

Additional rules shorten funds' average maturity limits, require periodic stress tests to ensure funds can maintain a stable net asset value per share in a crisis, implement procedures to identify investors whose redemption requests could pose a risk to the fund, improve how funds use Nationally Recognized Statistical Rating Organizations, and enhance portfolio disclosure, including making public a fund's "shadow net asset value," or the mark-to-market value of the fund's net assets, 60 days after it's made available to the SEC. As part of improving fund operations, the new rules allow funds' boards of directors to suspend redemptions if a fund is about to break the buck. Currently, funds are required to get an order for the SEC to do this.

SEC Chairman Mary L. Schapiro called the new rules "an important first step."

Royce Micro-Cap and Royce Premier to Close Friday
Effective Friday, Jan. 29, Royce is closing two funds to new shareholders: Fund Analyst Pick  Royce Premier (RYPRX), and  Royce Micro-Cap (RYOTX). Premier had reopened in January 2009 and Micro-Cap had reopened in January 2008. According to Morningstar fund flow estimates, both funds had positive inflows in 2008 and 2009, and Premier currently has $5.2 billion in assets, while Micro-Cap has $1.1 billion.

Premier combines small- and mid-cap exposure and is led by the experienced team of Chuck Royce and Whitney George, along with Lauren Romeo. The fund's long-term record is stellar: Over the past 10 years, its 10.8% annualized return is more than 3 times greater than the Russell 2000 Index's gain and crushes the mid-cap blend's 4.2% return. Its record over the past 15 years is also impressive.

Micro-Cap isn't immune to the rocky periods that can affect the smallest firms, but lead manager Jenifer Taylor and comanager Whitney George have produced strong results over the long term. The fund is in the small-blend category's top decile and easily tops the Russell 2000 Index for the 10- and 15-year trailing periods.

 

Deutsche Asset Management to Spin Off Teams
Two Deutsche Asset Management investment teams will set up their own separate boutiques by mid-2010, and they will continue to run the funds they currently manage as subadvisors.

Oliver Kratz, who has run  DWS Global Thematic (SCOBX) since late 2003 along with funds sold in Europe and Asia, will take his entire team with him, and the new firm will be owned by its staff. Investment ideas will be generated solely within that team, rather than utilizing Deutsche Asset Management's global analyst network.

Janet Campagna, who leads Deutsche's quantitative strategies group, will also establish a separate firm, along with the group's head of portfolio management, Robert Wang, and other senior team members. The group hopes to retain 40 staff members at the new firm, although details are still being hammered out. The quant team is responsible for running several equity and alternative strategies funds and comanages a number of the firm's asset-allocation funds, including the DWS LifeCompass target-retirement series.

The two teams were housed in Deutsche's institutional-focused DB Advisors unit, which now plans to concentrate on fixed income and cash management. Deutsche is providing legal, compliance, and operational support to the new shops during the transition, and a firm spokeswoman said this change will not impact fund fees.

Fidelity Suspends Two
As we noted last week, Fidelity recently replaced the portfolio managers on  Fidelity China Region (FHKCX) and Fidelity Advisor Emerging Asia (FEAAX).

This week, it was reported that Fidelity recently suspended two Hong Kong-based portfolio managers for suspected ethics breaches. The fund family confirmed that it is conducting an investigation but that no criminal conduct is alleged, and that the suspended managers' funds had been reassigned. Given the ongoing investigation and employee confidentiality issues, Fidelity would not confirm the names of the two suspended managers.

Eaton Vance's New Commodity Fund Helmed by PIMCO Vet
Eaton Vance recently filed with the SEC to launch Eaton Vance Commodity Strategy. The new fund will be managed by John B. Brynjolfsson via Armored Wolf, the investment management firm he started in 2008. He'd managed  PIMCO Real Return (PRRIX) from its 1997 inception through the end of 2007. Brynjolfsson was a member of the PIMCO management team that won Morningstar's Fixed-Income Manager of the Year honors in 1998 and 2000.

The new fund's I share's expense ratio will be 1.35%, and the filing indicates it won't invest directly in physical commodities but will invest in commodity-linked derivative instruments (including commodity index-linked swap agreements and structured notes, as well as commodity options, futures, and options on futures) backed by a portfolio of long and short positions in fixed-income securities.

Manager, Strategy, and Name Changes at Delaware
The team led by Marshall Bassett on  Delaware Trend ,  Delaware Growth Opportunities (DFCIX), and Delaware American Services  has been replaced by Jeff Van Harte's "Focus Growth" team, which currently runs  Delaware Select Growth (DVEAX) and  Delaware US Growth (DUGAX). The management changes went into effect on Jan. 21. Bassett's team remains with Delaware but does not currently have any direct portfolio management responsibilities.

On Jan. 19, the board of trustees for the fund approved a name change for Delaware Growth Opportunities, which will become Delaware Smid Cap Growth. Christopher Bonavico and Kenneth Broad have assumed primary management duties. The fund's objective and strategies have also changed to focus in the small- and mid-cap growth space.

Delaware Trend, which will retain its name, has also been assigned to Bonavico and Broad. The fund will be repositioned as a focused small/mid-growth strategy, generally holding 25 to 30 stocks in the portfolio, making it a far more aggressive strategy.

Delaware American Services will become Delaware Growth Equity. Van Harte will be a named manager on that fund, along with Bonavico, Broad, and the other managers on the Focus Growth team, including Christopher Ericksen, Patrick Fortier, Gregory Heywood, and Daniel Prislin. The fund will no longer be required to invest in service and service-related companies and will focus on growth firms of any size or market capitalization.

These name changes and objective changes will go into effect on March 22, 2010.

Overall, the changes appear to be positive. Bassett's team struggled over the past few years, whereas Van Harte's team, which joined Delaware from Transamerica in 2005, posted competitive returns with average volatility since joining the firm, and their performance at Transamerica was strong. They are value-oriented investors in the growth arena and run portfolios with relatively low turnover, focusing on companies with high cash flows, low debt, and wide moats.

Adding three mutual funds to the team's list of responsibilities would have been an area of concern, but the team has experience investing in companies up and down the market-capitalization spectrum. In addition to Select Growth (focused on mid- and large caps) and U.S. Growth (focused on large caps), the team has successfully managed Delaware Pooled Focus Smid-Cap Growth Equity (DCGTX) (concentrated on small- and mid-cap stocks), which is a more compact portfolio with fewer holdings and a strong record.

Two New Nuveen Funds
This week, Nuveen Investments announced the launch of two new funds: Nuveen Tradewinds Emerging Markets  and Nuveen Tradewinds Global All-Cap Plus . The former's benchmark will be MSCI Emerging Markets Index while the MSCI AC World Index will serve as the latter's benchmark. The Emerging Markets fund arrives on the heels of a particularly massive rally. The diversified emerging-markets category surged to a 73.8% return in 2009 after losing 54.4% the previous year. The world-stock category's gain wasn't as outsized, although it returned 35.3%. In contrast, the S&P 500 Index returned 23.4% last year.

The Global All-Cap Plus fund employs the strategy of  Nuveen Tradewinds Global All-Cap , though it also can short stocks.

Lord Abbett Drops Some Fees
Lord Abbett has reduced expenses on two international equity funds. The net expense ratio on the A share class of Lord Abbett International Core Equity (LICAX) dropped from 1.43% to 1.12%. The net expense ratio on the A share class of Lord Abbett International Dividend Income (LIDAX) dropped from 1.35% to 1.12%. The reductions took effect Dec. 31, 2009.

The fund family also announced 12b-1 fee reductions (from 0.35% to 0.20% for A shares) for a range of fixed-income funds: Lord Abbett Floating Rate (LFRAX), Lord Abbett Core Fixed Income (LCRAX), Lord Abbett Total Return (LTRAX), and Lord Abbett Income (LAGVX). The reductions will go into effect Feb. 1.

Etc.
The Needham Funds announced that effective Jan. 1, John Barr has replaced Bernard Lirola as co-portfolio manager of Needham Growth (NEEGX), joining Christopher Retzler, and as portfolio manager of Needham Aggressive Growth (NEAGX). Lirola has left the firm.

Ron Fielding, the former OppenheimerFunds senior vice president and portfolio manager who ran Oppenheimer's Rochester division until he retired in May 2009, has joined the board of Saturna Investment Trust, which includes the six Saturna funds.

On Jan. 29, the Brazos funds will become the PineBridge funds. Brazos Micro Cap  will change its name to PineBridge US Micro Cap Growth, Brazos Small Cap  will be renamed PineBridge US Small Cap Growth, Brazos Mid Cap  will be renamed PineBridge US Mid Cap Growth, and Brazos Growth  will be renamed PineBridge US Focus Equity.

Several Pioneer funds will merge by March 5, 2010.  Pioneer Tax Free Income  and Pioneer Intermediate Tax Free Income  will both merge into Pioneer AMT-Free Municipal (PBMFX). Also, Pioneer Growth  will merge into Pioneer Fundamental Growth (PIGFX).

The board of DFA approved a merger of DFA US Large Company  into DFA US Large Company Institutional Index (DFUSX).

Pending shareholder approval, several Evergreen and Wells Fargo Advantage funds will merge: Evergreen Core Plus Bond  will merge into Wells Fargo Advantage Income Plus (STYAX), while  Evergreen Core Bond , Evergreen Short-Intermediate Bond , and Wells Fargo Advantage Diversified Bond  will merge into  Wells Fargo Advantage Total Return Bond (MBFAX).

Delaware Small Cap Growth  will liquidate all assets by March 22, 2010.

Rafi Zaman of DuPont Capital was added as a subadvisor to Alternative Strategies .

Nathan Strik joined the portfolio management team of Fidelity Balanced (FBALX) and  Fidelity Advisor Balanced (FABLX).

Jonathan Beinner and Tom Kenny are off the portfolio management teams of Goldman Sachs US Mortgages (GSUAX),  Goldman Sachs High Yield (GSHAX), and Goldman Sachs Emerging Market Debt (GSDAX).

Following its recent purchase by Macquarie Group, Delaware Investments has launched Delaware Macquarie Global Infrastructure.

Associate directors of fund analysis Miriam Sjoblom and Dan Culloton and mutual fund analysts Jonathan Rahbar and David Falkof contributed to this report.