Mutual fund giant Vanguard, best known for its indexes expertise, is planning its first participation in a long/short fund, according to Dow Jones.In conjunction with Charles Schwab Investment Management, Vanguard has proposed reorganizing its $21 million Laudus Rosenberg U.S. Large/Mid Capitalization Long/Short Equity Fund into a new fund using long/short market-neutral strategy. It will be the first the mutual fund in Vanguard’s line-up to have shorting equities as a significant portion of the investment process.
AXA Rosenberg Investment Management will continue as an investment advisor to the reorganized fund, but the quantitative equity group at Vanguard will also sub-advise a portion of the fund.
Vanguard anticipates the fund to appeal to institutional investors, mainly foundations and endowments. Investor shares of the fund will require a minimum first investment of $250,000 and institutional shares will require a minimum of $5 million investment.
“It’s really new for them,” said Dan Culloton, an analyst at Morningstar. “It’s obviously something that’s been a popular strategy in the mutual fund industry, a growing strategy that a lot of managers are taking up. I guess it wasn’t something I anticipated from Vanguard, but they have a growing institutional business, and their argument is that they’ve been getting demand for a long time from institutional investors for something like this.”
Shareholders of the fund are expected to be mailed a proxy statement detailing the proposed reorganization in early October, and a shareholder meeting is set for Mid-November. If approved, the tax-free reorganization should be completed by year-end.
The new fund would seek performance higher than the returns of three-month U.S. Treasury bills. Each advisor will individually buy securities deemed undervalued and sell short an approximately equal dollar amount of securities deemed overvalued.
“I guess they’re just trying to round out their offerings a bit,” said Daniel Wiener, editor of the Independent Adviser for Vanguard Investors newsletter. “One of the big benefits for the funds is going to be that the they’re going to cut the expense ration,” he said.
The existing fund charges an expense ration of 1.54% on its investor shares and 1.24% on its institutional share classes. The new fund will have an estimated expense ration of .75%, while institutional shares will carry an estimated ratio of .60%, according to Vanguard.
“Anytime Vanguard enters a category, they automatically introduce some fierce price competition. The fees are going to be pretty low here relative to the category, as you would expect,” said Culloton.
“I would assume that they’ve given this process a few dry runs and are confident that they can do it competently,” he said. “The proof will be in the pudding, of course, but the Vanguard quantitative equity group has a pretty good record with the other quant funds it runs,” Culloton said.
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