Vanguard introduces new line of mutuals


January 16, 1994|By WERNER RENBERG | WERNER RENBERG,1994 Werner Renberg

You learn early in an elementary journalism course that it isn't news when a dog bites a man. It's only news when a man (or, for that matter, a woman) bites a dog.

If you apply this test, it may not be news when Vanguard, the leading sponsor of funds that match the performance of various securities indexes, launches another.

But its latest launching is news.

In introducing not one but three -- the Short-, Intermediate- and Long-Term Bond Portfolios of the Vanguard Bond Index Fund -- the firm brings a range of risk/reward characteristics in index-matching investments to the taxable bond fund universe.

Until now, diversity in passively managed mutual funds has been available only among those that track the Standard & Poor's 500 and other equity indexes. Vanguard's 500 Portfolio is by far the largest of these with nearly $8 billion in assets.

The new funds, which bring to 13 the number of Vanguard index funds for individual investors, will be managed to match the performance of U.S. Government and investment-grade corporate securities, as measured by new indexes created by Lehman Brothers.

They join Vanguard's Total Bond Market Portfolio, known until now as Vanguard Bond Index Fund. Since 1986 it has been managed to duplicate the total return of indexes that reflect the prices of all outstanding, fairly liquid investment grade securities maturing in one year or more. It tracked the Salomon Brothers Broad Investment-Grade (BIG) Bond Index from inception until June 1993, when Vanguard switched to the almost identical Lehman Aggregate Bond Index.

Fidelity also has a fund that tracks the Lehman index while SEI's tracks Salomon's. Neither is directly marketed to individuals. Fidelity's is sold only to institutional investors while SEI's is sold only through institutions or investment advisers.

Whichever index is used, a fund that matches it matches the price behavior of the U.S. Treasury and agency, mortgage-backed and corporate securities that make up the $4.3 trillion investment grade market. Treasuries and agencies account for a little over 50 percent; mortgage-backed, nearly 30 percent; and corporates, nearly 20 percent.

A portfolio with such a mix can be desirable for some, but it can have drawbacks for others. Its heavy weighting of mortgage securities can help performance when interest rates are stable but hurt when falling rates stimulate mortgage prepayment.

Its preponderance of government and mortgage securities, whose average maturities are shorter than those of corporates, gives such portfolios a weighted average intermediate maturity of around 9 years.

To enable Vanguard to offer the new portfolios, Lehman created new indexes by dividing into three maturity classes the 3,900 issues constituting the $2.9 trillion universe reflected in its Government/Corporate Index. They exclude some 700 issues of mortgage-backed and asset-backed securities reflected in the Aggregate Bond Index.

The Short-Term Portfolio will invest in government and corporate securities chosen to match the Lehman Brothers Mutual Fund Short (1-5) Government/Corporate Index, whose maturities range from 1 to 5 years and averaged 2.9 years as of Sept. 30.

Securities in the index matched by the Intermediate-Term Portfolio have maturities ranging from 5 to 10 years and averaging around 7.5 years while those included in the index matched by the Long-Term fund will have maturities exceeding 10 years and averaged 23.3.

Since the weighted average maturities of all outstanding governments and agencies are shorter than those of investment grade corporates, the funds' mixes will differ slightly: corporates make up 33 percent of the long-term index but only 13 percent of the short-term one.

To enhance the latter's income, Vanguard may invest slightly more in corporates, which yield more than governments, than the index calls for, according to Ian A. MacKinnon, senior vice president.

Like equity index funds, the new portfolios offer you:

1. Performance that is relatively predictable and may be superior to actively managed funds invested in similar securities. Adjusted for costs and low-yield cash reserves, they're unlikely to do worse than the indexes they track. Naturally, they won't do better either.

2. The lower (0.2 percent) annual expenses -- and higher returns -- that you should expect of a fund that does not require active management.

3. The opportunity to choose index funds on the basis of the risk/reward profile appropriate for you. If you are willing and able to incur higher interest rate risk, you may be able to achieve the higher long-run returns that, as the table indicates, a long-term portfolio can produce. If even the moderate risk of the Intermediate-Term Portfolio is too much for you, you can pick the less risky Short-Term Portfolio and still earn returns that beat money market funds.

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