Jon Cleborne
Jon Cleborne

Vanguard’s Portfolio Review Department, led by Jon Cleborne, is at the heart of the company’s fund oversight and governance process. Mr. Cleborne recently discussed several of the fund-related proposals on the recent launch of two new global balanced funds, and the continued growth of Vanguard’s exchange-traded fund (ETF) lineup. 

One of the proposals on the proxy, if approved, would give Vanguard the ability to hire a subsidiary to manage its funds. Can you explain?

Vanguard invests considerable energy and resources to ensure that our funds are in the hands of the best investment teams. Right now, the Vanguard investment professionals at our headquarters in Malvern, Pennsylvania, are essentially the only ones permitted to serve as investment advisor to a large number of our funds. Why wouldn’t we want one of our portfolio managers in London—who works for one of our subsidiaries—to bring his or her expertise and experience to a fund with significant European exposure? We’ve built out our investment management teams and technology in order to manage money on a global basis. We believe there may be instances where we can generate better results for our clients by making portfolio decisions a bit closer to home markets.

Similarly, Vanguard is seeking approval to have third parties manage its funds. Same reasoning?

Yes. Many of our funds were granted the ability to retain third-party managers without prior shareholder approval in a 1993 proxy vote. We are simply standardizing this policy across all funds—index and active. It gives us the option to hire another advisor to diversify a fund management team. For example, we added Vanguard Fixed Income Group to the advisory team of Vanguard Long-Term Investment-Grade Fund in 2013 to complement Wellington Management. As it stands now, we do not have the ability to add Wellington Management or another external advisor to, for example, Vanguard Short-Term Investment-Grade Fund, if we deemed it to be in the best interest of clients.

With shareholder approval of these two proposals, all Vanguard funds could operate under “manager of managers” structures that are common in the mutual fund industry. We are not asking for anything unique, as other leading firms have this ability across their lineups.

Are these proposals designed to save costs?

Yes, in the sense that a proxy is not an inexpensive proposition, and obtaining shareholder approval for even periodic advisor changes would result in onerous and unnecessary costs. There is also potential opportunity cost in not having the right team in place to manage a fund.

But doesn’t it seem inconceivable that you’d want to replace Vanguard as an advisor to one or more of your index funds?

If we found a manager to run an index fund cheaper and better, potentially, yes, we could make that change. In reality, the main consideration at play here is business continuity. We invest considerable energy and resources in contingency planning, ensuring we have the people, processes, and systems in place to manage our clients’ assets through any contingency—natural or man-made disaster, the loss of key personnel, or a technology or infrastructure issue. While it’s not pleasant to think about, should something catastrophic happen to Vanguard’s headquarters, we’d want the funds’ boards of trustees to have the option of naming a new investment advisor without a shareholder vote. We want to leave nothing to chance in executing our responsibility in managing other people’s money. 

How do you select advisors?

We have a rigorous process in place to evaluate advisors and that I have the privilege to lead has a long, successful track record of manager oversight. We get down deep in the weeds, examining people, process, philosophy, portfolio, and performance. It is a high bar to manage money for Vanguard. And we cast the net far and wide when looking for advisor talent, considering everyone from large asset managers to small boutique firms around the world to run mandates for us.

Why is Vanguard pursuing a change in the benchmark for the REIT Index Fund?

To clarify, we are seeking approval to change the investment objective for the REIT Index Fund as well as the REIT Index Portfolio of the Variable Insurance Fund, which would then result in a change in the benchmark. It is really about alignment. This change would align the funds with the updated Global Industry Classification Standard methodology, an industry-recognized approach to classifying global market sectors. Vanguard’s ten other sector index funds currently seek to track MSCI benchmarks under this methodology.

An added benefit is broader diversification. The proposed benchmark is the MSCI US Investable Market Real Estate 25/50 Index, which includes real estate management and development companies in addition to real estate investment trusts, thereby offering broader exposure to the real estate market. The current benchmark offers exposure only to publicly traded equity REITs.

Tell us about the new global balanced fund offerings.

We are pleased to add to our already robust balanced-fund lineup. Our new Global Wellington™ and Global Wellesley® Income Funds provide broad diversification among global stocks and bonds in a single portfolio. In essence, they represent Vanguard investment philosophy—balance, diversification, discipline, low cost, and a long-term approach.

Why did Vanguard select Wellington Management?

Vanguard’s relationship with Wellington dates back to our founding. Wellington manages more than $350 billion on behalf of Vanguard clients, including some of our oldest and largest active funds, such as the Wellington™, Windsor™, and Wellesley® Income Funds. In short, we chose Wellington Management for its deep international expertise and proven track record managing balanced portfolios. The firm manages $1 trillion worldwide with offices serving more than 65 countries, and we’ve tapped some of the same experienced investment professionals who’ve built a great record with Wellington and Wellesley Income Funds.

What’s on the horizon for new ETFs?

Over the past few years, we’ve really accelerated the pace of ETF launches abroad. Since 2015, we have launched nearly 30 ETFs in Canada, Australia, Hong Kong, and Europe. In the United States, where the ETF industry is more mature, our aim is to complement our current roster of 70 ETFs.

One example is Vanguard Total Corporate Bond ETF (VTC). We filed a registration statement for the fund in August and expect it will launch in the next few weeks. The fund will solidify Vanguard’s position as the low-cost leader in the corporate bond ETF space. VTC will also be Vanguard’s first ETF-of-ETFs, investing in our three current corporate bond ETFs.

Our product development philosophy is based on offering low-cost, high-quality products that are sound, enduring, long-term, and meet our clients’ needs. This is just one reason why Vanguard has grown its lineup to an incredible $11 billion in assets on average per ETF. 

What about active ETFs? 

Vanguard also recently received the regulatory relief necessary to offer active ETFs in the United States. While this is new in the United States, we already offer actively managed ETFs in international markets. In December 2015, Vanguard launched four factor ETFs in Europe and, in June 2016, four factor ETFs were brought to market in Canada.

While it’s too early to discuss specific plans at this point, we’re excited to have the flexibility to offer actively managed investment strategies in an ETF product.


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