billaster wrote: ↑Mon May 23, 2022 7:26 pm
retiringwhen wrote: ↑Mon May 23, 2022 6:36 pm
Second, fund flows almost always happen when a different fund attracts money from the losing, less attractive fund by some more attractive feature. That is what happened with most of the examples provided in the article. That is also exactly what happened to Vanguard investors. This is an actual expected outcome, the only thing I will agree is that is unusual for the same Fund Complex to be the poacher.
So Vanguard was afraid that Fidelity would poach their retail investors and cause large capital gains so Vanguard poached them themselves to cause large capital gains.
I recall this as "we had to destroy the village in order to save it." It will be hilarious if Vanguard tries this argument in front of a jury.
No, the simple thing if Vanguard was afraid of poaching was to just cut all fees across the board for retail and institutional investors. It would have taken a mere stroke of the pen, figuratively speaking. And that indeed was exactly what they did -- after they had knee-capped their own clients.
They had a problem with no longer being the low-cost provider and in the past Fidelity had put some hurt on them in this exact market, and now Schwab appeared to be prepping for an attempt to gain some market share. Vanguard had pressure that could have caused a serious loss of AUM. For small institutions in the $5M to $100M it could easily be done within 6 mos., in smaller plans with just a few participants it could likely be done in a week or two. My conjecture was that Schwab was gunning for that business as their clients probably had a large number of small businesses that would be easily poached from Vanguards now very uncompetitive offering via advisors and other channels.
The mechanics of lowering the ER on those funds is not a stroke of a pen as it would require the movement of the underlying funds to either new share classes (trivial) or transfer to different funds completely (more complicated, but doable, but it could also cause capital gains issues if not handled well) as the ER is a roll up of the underlying funds. The ER can only be changed once those moves are made and must match the underlying funds exactly.
BTW, there are no Vanguard multi-share class funds of funds for this reason I believe thus making the solution used with the large index funds moot.
I would guess Vanguard did NOT want to lower the costs of their retails funds to 0.08% for all the unwashed masses with $1,000 Roth accounts and instead made the move to use a stroke of a pen to lower the minimum on the institutional fund instead. They were then surprised that 8,000 companies all jumped in the next 6 mos. and they created a mess that was much bigger than projected. The mess required a fix and the merger and lower ER turned out to be best solution. It is easy to be a backseat driver, but it could have easily gone very differently both good and bad.
Let's consider some alternate history possibilities:
1.) Vanguard sat still on their ER and waited the 6-9 mos. and saw half the 401K retail assets leave. They would have been lambasted by the industry for being losers, lost prestige and market-share while also sticking all their retail fund customers with huge capital gains.
2.) Let's say instead things happened just like they did, but instead of seeing the US Stock and Bond markets return nearly unprecedented returns, they simply returned the projection that Vanguard put out for 2021 of about 4%. One of the other posters estimated that such a different market would have made the capital gains event almost completely disappear! Maybe the fund managers considered the funds flows problem and considered it likely to be small, but instead the market had a historical blow out!
It is easy to criticize decisions after the fact, but it is a lot harder to look at a situation with only the information available at the decision time. I am not arguing Vanguard is somehow angels here, I am only pointing out that this was not a capricious decision made that was assured to be detrimental to a vanishingly tiny set of shareholders, it was surely done in the context of a complex, competitive environment with strong incentives to retain customers.
One point, not often pointed out, but implied: it is pretty well known that Vanguard executives are compensated and incented based upon growth of AUM, so any threatened loss of assets would be expected to be attacked vigorously. This does demonstrate a very good example of the Agency risk problem.