MALVERN, Pa. - Mutual fund giant The Vanguard Group is trying to jump-start its corporate defined benefit business, launching eight passively managed commingled trusts and five actively managed structured equity portfolios.
Vanguard's effort effectively launches a major player into the indexing business and marks the first time that the firm, with $557 billion in total assets, has run actively managed assets in-house for external clients.
Although Vanguard has $163.3 billion in defined contribution plan assets under management, it has only $9.3 billion under management for defined benefit plans, two-thirds of them corporate plans.
The 13 commingled trusts were developed to appeal to large pension funds. Until now, Vanguard hasn't had a vehicle to attract them, although smaller pension funds have invested in Vanguard's index funds.
The new trusts will be managed in-house under George "Gus" Sauter, the new chief investment officer at Vanguard and long-time head of the quantitative group. Joel Dickson, portfolio manager in the quantitative equity group and head of the active management team, will lead a group of seven dedicated portfolio managers, eight traders and four researchers. No additional staff will be hired, Mr. Dickson said.
"It's a natural extension of what we've been doing," he said.
`In the catbird seat'
Industry pundits generally approved of Vanguard's move.
"Vanguard is in the catbird seat," said Kent Novell, president of Novell Consulting Group, West Hartford, Conn.
In a market where there is a flight to quality by plan sponsors and consultants, he said, the firm is well-positioned to make headway in both the active and passive areas.
"They have enough of a reputation that if they wanted to go head to head with State Street and BGI, they could," he said. Mr. Novell was referring to State Street Global Advisors Inc., and Barclays Global Investors Inc., which dominate the indexing business.
But it won't be easy said Christopher Acito, partner at Casey Quirk & Acito LLC, Darien, Conn. "It's going to be tough to go up against the two big entrenched players," said Mr. Acito, particularly in the large plan market, where there is little turnover and few searches. Still, he said, Vanguard has a fighting chance, because of its reputation and name recognition.
Mr. Acito said executives of large pension funds are looking for cost-conscious indexers, which could benefit the notoriously cost-conscious Vanguard.
Vanguard's eight index portfolios mirror the Russell 1000, Russell 1000 Growth, Russell 1000 Value, Russell 3000, Russell 2500, Russell 2000, Russell 2000 Growth and Russell 2000 Value. The firm already manages defined assets in commingled trusts that mirror the Standard & Poor's 500 and Wilshire 5000 indexes.
The five structured equity portfolios are large-cap equity, benchmarked to the S&P 500; large-cap value, benchmarked to the Russell 1000 Value; large-cap growth, benchmarked to the Russell 1000 Growth; total market, benchmarked to the Russell 3000; and extended market, benchmarked to the Russell 2500. Vanguard runs $3.5 billion in active equity assets managed in a variety of Vanguard mutual funds. It has not marketed these portfolios to external institutions until now.
The structured equity portfolios will hold one-third to one-half of the stocks in the corresponding benchmarks, Mr. Dickson said.
Vanguard already has snagged its first client for the structured large-cap portfolio: the $523 million pension fund of Saudi Aramco, Houston, awarded Vanguard $136 million, said Debbie Johnson, the fund's financial analyst.
Quant group's reputation
Ms. Johnson cited the reputation of Mr. Sauter's quantitative group as a reason for selecting Vanguard. Vanguard replaces Deutsche Asset Management, which sold its structured equity business to Northern Trust Global Investments Inc. last year.
While the growth of indexing has slowed, enhanced - or structured - indexing has become popular as plan sponsors seek low-tracking-error portfolios. "It's a good time to be coming to the market with a structured product," said Mr. Acito. But for Vanguard, which doesn't have a long history of active management, "that's a different sell."
Mr. Dickson said Vanguard is committed to gaining market share in these markets. "Vanguard's a recognized giant in the marketplace on the indexing side," he said. "We're not so well known on the structured equity side, but we hope that will change."